Understanding Market Equilibrium and Externalities

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Economics for managers
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Features of market structures
There are different markets within an economy. The markets exist due to the types of
competition in that market. Each market has different characteristics making it unique
compared to others. Economic planners have a duty of creating policies that control the
existence of the markets without exploiting consumers. (Arnold, 2015)
Monopoly market
This is a structure made up of one supplier of a commodity and a large number of
customers in the market (Behravesh, 2014). The size of a monopoly does not matter in the
definition because small suppliers can also be monopolies. This indicates that a monopoly is
the only supplier of a certain commodity in the market. Most monopolies charge high prices
for their products due to lack of competition. Monopolies result from private access of raw
materials. This ownership enables firms to become the sole producer of a product. The entry
conditions into a monopoly include such as the ownership of private raw material access
which other firms do not have.additionally,the ability to pay the high market entrance costs
enable suppliers to enter a monopoly market (Burda, July 25, 2017).
Oligopoly
This is a market system, which only a few number of firms control the market
(Flynn, 2011). There is similarity to a monopoly only that in oligopoly, it is more than one
supplier in the market. There is no set limit to the maximum number of supplier in an
oligopoly. However, the number is low to ensure that the actions of one firm influence the
actions of the other firms. Oligopolies ability to set prices for their products enables them to
set the prices they want other than take prices from consumers. The products in this market
are such as oil, which has privacy of ownership and high market entry fees. For a supplier to

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enter this market, they require to have the finances to pay the high market entry fees or
privately own the products dealt with by the oligopoly.
Perfect competition
Perfect competitions exist where consumers set prices, firms sell identical products,
sellers have a small market share, buyers have all the information about the market and the
market has freedom of entry and exit (James Michael Stewart, 2015). This market is
usually theoretical and it is what other markets could wish to become. The consumers in this
market have alternatives to buy from other suppliers when one supplier charges high fees.
The companies are characterised by earning just enough profits to enable them survive in the
market. Entry to the market is easy as there are no barriers to enter the market. Suppliers try
to gain market by differentiating their products and advertising them. They try to cut prices to
gain more customers and charge high prices sometimes to increase their profit margins.
Monopolistic competition
This market sell similar products but are not perfect substitutes (Jones, 2017). There
are low barriers to entry in the market and the actions of one firm do not affect the actions of
other firms in the market. The market suppliers set prices for their products and the customers
buy at those prices. The market players have little market power and thus are not able to
influence each other’s actions. The entry to the market is easy as there are few barrier of entry
thus new suppliers cans enter and leave the market at will.
Short run and long run profits and losses
Short run period refers to a period when a firm incurs both fixed and variable costs
during a production period (Jones, 2017). This period prevents the outcome, salaries and
prices of a firm from attaining equilibrium. On the other hand, long run is the period in which

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all production costs are variable and firms are able to adjust to costs. Long run enables firms
to control their cost while in short run; firms are only able to control prices through adjusting
their production levels.
Perfect competition market
Short run profits are realised when the price of commodities is more than the average
total cost (Lee Coppock, 2017). The firm’s production is usually at a point where marginal
revenue equals marginal cost. This indicates that the firm is realising profits within the short
run period of production.
Perfect competition markets incur short run losses when the prices are less than
average total cost for the firm. The production level is usually at a point where marginal
revenue is equal to marginal cost. This way the firm tries to reduce short run losses.
Long run profits refers to when the market is making economic gains from market
activities (MIller, 2017). The reason for increased gains is due to increase in the supply
activities such as gaining new customers. The aim of firms is to ensure that they live this
period for long avoiding losses. Long run losses refers to when the firm commodity prices are
less than the variable costs incurred in production. The firm at this period may consider
leaving the industry if they are unable to reduce the variable costs.