Analysis of Market Structures: Economics for Managers Report

This report provides an analysis of various market structures, including monopoly, oligopoly, monopolistic competition, and perfect competition, outlining their key characteristics and differences. It explores the concepts of short-run and long-run profits and losses within each market structure, expla...Read More

ECONOMICS FOR MANAGERS 1
Economics for managers
Name of institution
Name of student
Name of instructor
Date

ECONOMICS FOR MANAGERS 2
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 enter this

ECONOMICS FOR MANAGERS 3
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
all production costs are variable and firms are able to adjust to costs. Long run enables firms

ECONOMICS FOR MANAGERS 4
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.

ECONOMICS FOR MANAGERS 5
Monopoly
Short run profits refers to the period when a monopoly demand curve is greater than
the average total curve (MIller, 2017). This is usually at a certain quantity where the
monopoly earns short run profits. Short run losses refers to the point where the demand curve
is less than the average total curve.
A monopoly earns long run profits when the monopoly revenues are more than the
costs incurred (Mankiw, 2017). When all production factors remain constant then the
monopoly continues making profits in the long run. The monopoly tends to prevent other
firms from entering the market so that they continue making profit. The long run losses are
when the variable costs for production are more than the revenues earned by the firm. The
company tries to reduce the losses by increasing the prices for their products.
Diagram
Monopolistic competition
Firms earn short run profits when the demand for products is less than average total
cost. Short run losses occur when the average total costs exceeds the demand for product
(Margaret Ray, 2015). In the long run unlike in the short run, the firms make normal profits.
The demand is equal to long run average cost at a quantity point where marginal revenue
equals marginal cost.
Diagram

ECONOMICS FOR MANAGERS 6
Oligopoly market
Short run profits for oligopoly is similar to that of a monopoly. There is high demand
compared to average total costs (Masulis, 1988). The short run losses occur when the firm
incurs a high average total cost compared to demand. The long run is when the firms in the
oligopoly makes normal profits. The demand is usually equal to average cost and the
marginal cost equals marginal revenue.
Comparison of resource allocation
Monopoly, oligopoly and monopolistic market structure have similar allocation of
resources (McConnell, 2014). They are the sole suppliers for their customers and thus
regulate the amount of products that they supply to consumers. These markets are sometimes
unable to supply enough products to their customers when they are more than the products.

ECONOMICS FOR MANAGERS 7
The prices set for this markets are usually unfair because the markets are price makers and
the consumers have to buy at this prices. When compared to perfectly competitive structure
the resource allocation in terms of prices is unfair to the consumers. Perfect competition sets
prices that customers are able to afford thus referred to as price takers. The other markets are
unfair in this aspect because they set prices for the consumers and may set very high prices
that are unfair to a consumer.
Secondly, when compared in terms of the resource distribution among the players in
the market, the perfect competition is fair in its distribution. Perfect competition players have
resources equally compared to the other markets where one individual or a small group has
the sole ownership of resources (O'Sullivan, 2005). This is usually unfair for the players
because it restricts other players from entering the market.
In addition to that, perfect competition avails products to their customers in amounts
that satisfy their demand more compared to the other markets. Perfect competition due to the
many suppliers in the market is able to supply a high number of products to customers
compared to the other markets where the sole supplier may lack the capacity to produce
enough products to satisfy demand.
There are no barriers to access resources in perfect competition due to the ease of
entry to the market unlike in the other markets. Markets such as monopoly, leaves access to
resources only to those with sole ownership of resources unlike a perfect competition where
one is able to enter and leave the market at will.
Negative externalities
These are costs are suffered by third parties because of production activities by firms
(Paul Krugman, 2015). Producers are first parties and consumers form the second party while
third parties are bodies affected by production activities indirectly. Negative externalities

ECONOMICS FOR MANAGERS 8
result to a cost called external cost. Examples of externalities are such as waste products
arising from carbon emissions in factories. A reason for the occurrence of externalities is the
lack of property rights on natural resources such as water bodies and land. The lack of
policies to protect an ocean results to factories dumping wastes in the ocean causing
pollution. Legal policies are necessary to prevent environmental polluters from doing so
without fear of legal consequences. External costs increase the marginal social cost for a firm
than the private marginal cost (Sowell, 2014). Negative externalities are a stress because they
result to an expense on the part of both the producer and the society. The firm incurs a cost of
preventing harmful effects of their waste on the environment. For example the cost of
cleaning waste water before dumping it into a river. Wastage water cleaning ensures that the
water does not pollute the river causing water borne diseases on the consumers. There is also
the need to clean gas emissions so that when released to the air they will not cause air
pollution. On the other hand, the society incurs a cost of protecting itself from harmful effects
of environmental pollution. The society suffers costs such as that of cleaning water from
polluted rivers to prevent water borne diseases. The society incurs unnecessary costs for
activities that they do not benefit directly (Suranovic, 2010). Therefore, there is a need to
protect the society from negative externalities. Firms have to ensure that production takes in
environmentally friendly ways such as putting air filters to prevent harmful gas emissions
into the atmosphere.
Diagram

ECONOMICS FOR MANAGERS 9
Negative externality case study
In America, the transport sector causes many negative externalities such as the
emission of carbon fumes from the burning of fuel. These gases are dangerous to the society
because of the resulting damage to the environment. Polluted air causes airborne diseases
such as asthma causing the government to incur financial expenses in buying medicines for
the affected. The government also incurs a cost of trying to clean the air from these
pollutants. The government also incurs costs in research and development of drugs to cure
new illnesses that emerge from the harmful effects of the emissions.
Fuel fumes from automobiles cause damage if the ozone layer of the atmosphere
resulting to climate changes in America. Temperatures in America increase each year. This
trend is worrying because of the resulting reduction in water levels in oceans and other water
bodies. There is also reduction in the yearly amounts of rainfall causing problems to the
agriculture sector. The fumes from vehicles cause all this damage.
Vehicles have also caused congestion in roads and cities. Vehicle ownership in
America has increased in the past years at a very high rate. This has caused lots of congestion
in the towns, as many citizens prefer using their vehicles than public means of transport. The
congestion results from such as traffic jams, which traps vehicles in roads. Lot of time
wastage happens in traffic jams reducing time for important economic activities. Congestion
results from parking lots, which take up large spaces. Without the many vehicles, the parking
lots would be clear making town centres more spacious.
The American government incurs huge expenses trying to reduce the effects of
externalities. Governments try to reduce the effects because in most cases they cause the
society added unnecessary costs. The society pays external costs trying to protect themselves
from the harmful effects of the externalities.

ECONOMICS FOR MANAGERS
10
Solutions to externalities
The government, society and producers have come up with solutions to solve the
problem of negative externalities. All players in the market put efforts in reducing negative
externalities for the good of their market. For example when a producer fails to prevent air
pollution, then it damages its image in the society. The consumers also protect themselves
from negative externalities through such as treating home water. The consumers are very
important also in ensuring that they push producers to come up with solutions to externalities.
In USA, various solutions solve the problem of negative externalities caused by
automobiles. For example the government through the technology sector has come tried the
possibility of using electric vehicles. These vehicles do not use petrol and diesel, which emit
carbon fumes into the air. Electric vehicles are the future of cars that do not cause pollution.
Electric vehicles are powered using solar energy or electricity, which are very friendly to the
environment. Solar energy is considered environmental friendly and thus when used in cars,
then the problem of carbon fumes is eliminated. Use of electric powered vehicles saves the
government finances because of the reduction of air pollution, which is usually a cost to the
government. There is also a reduction in the amounts used for importing petroleum.
The problem of global warming caused by carbon fumes solved through various
methods. The American government and NGOs sponsor tree planting campaigns. Tree
plantation helps largely in controlling the increase of carbon in the air. This prevents damage
to the ozone layer thus reduce the global warming effects. This solution is important to the
country as it reduces expenses incurred by the society trying to curb the effects of global
warming. The agricultural sector too improves due to the availability of water, as the water
bodies do not experience reduction in water levels. Rainfall amounts also increase and this
boosts the environmental sector largely.

ECONOMICS FOR MANAGERS
11
The government has also come up with solutions to curb congestion caused by
vehicles. Government policies such as preventing the citizens from driving their vehicles to
the city centres. This has resulted to fewer vehicles in the city centres thus vehicle congestion
reduction. Traffic jams reduction have also been experienced in the towns because of the few
vehicles brought to town,additionaly the roads have been tailored to correct the problem, of
traffic jam.dual carriages and underground roads have increased the capacity of roads thus
reducing time wastage on roads through traffic jams
Effects of externalities on monopoly and perfect competition
Monopolies have lesser negative externalities compared to other markets (Tucker,
2016). Monopolies operate in markets without competition unlike other markets. Monopolies
do not need to increase their production levels to compete with the market. Increase in
production results to more pollution due to extra waste. This problem does not usually apply
to monopoly markets. However, when a monopoly produces a negative externality such as
pollution, the monopoly produces less than the social optimal output. The monopolies due to
lack of competition try to cover their costs through reducing production and increasing the
prices of their products. This causes a problem to the market due to the low supply and high
prices. The market also fails to operate at equilibrium due to low supply and high demand
(Tyler Cowen, 2014). Monopolies do this due to lack of competition in the market. The
reduction of supply of products to the market below the demand of the product results to
market inefficiencies. Consumers buy less of the products and on the other hand, the
producers fail to recover full benefits from sales. This results to dead weight loss in the
market as well market inefficiency. Monopolies require constant control by the government
to ensure that they do not ignore paying social costs for damages caused by their production
activities.

ECONOMICS FOR MANAGERS
12
In perfect competition, there are higher effects of negative externalities compared to
monopolies (Williamson, 2013). When faced by competition in the market, firms tend to
produce more for the market. More production means added pollution such as air pollution
and water pollution. The companies face added social costs for their damages on the
environment. For companies to beat competition, they tend to increase the quantity produced
and reduce the prices for products than competitors. The result is that consumers tend to buy
more products due to reduced prices in the market. Companies however, due to reduced
prices fail to realise the full benefits of their production. This results to a market inefficiency
whereby the supply and demand are not at equilibrium, this time having more supply than
demanded. Dead weight loss incurs because the companies do not earn intended profits from
their increased production. The government controls perfect competition markets from
ignoring social costs caused by their production activities.
Diagram
Conclusion
The markets within the economy are important in determining the supply and demand
for products. Policies and measures to ensure that demand and supply remain at equilibrium

ECONOMICS FOR MANAGERS
13
are important. Price observation makes sure that the consumers do not pay prices higher than
the utility of the products.
Negative externalities increase the cost of products for consumers and the cost of
production for firms. The parties in the market need to come together and try to prevent the
externalities such as air pollution and water pollution. The government should also ensure
that firms pay for the pollution caused by their production activities.

ECONOMICS FOR MANAGERS
14
References
Arnold, R. A. (2015). Macroeconomics (12th ed.). South Western College.
Behravesh, N. (2014). Economics USA 8th edition. W.W.Norton and
Company.
bolman, l. a. (2013). reframing organisations:artistry,choice and leadership.
Burda, M. (July 25, 2017). Macroeconomics (7th ed.). Oxford University
Press.
champlain, j. j. (n.d.). auditing information systems. carlifornia: wiley.
Flynn, S. M. (2011). Economics For Dummies (2nd ed.). For Dummies.
James, M. C. (2015). Certified Information Systems Security Professional.
Sybex.
Jones, C. I. (2017). Macroeconomics (4th ed.). W.W. Norton & Company.
Kothari, P. S. (2004). Corporate Accounting. Massachusetts: Sloan
Management.
larry, b. j. (n.d.). auditing:concepts for a changing environmen. california:
south western college.
Lee, D. M. (2017). Principles of Macroeconomics (2nd ed.). W.W.Norton &
Company.
Mankiw, G. (2017). Principles of Economics (8th ed.). South Western College
Pub.
Margaret , D. A. (2015). Macroeconomics for AP (2nd ed.). Worth Publishers.

ECONOMICS FOR MANAGERS
15
Masulis, R. (1988). The debt/equity choice. Cambridge: Ballinger.
McConnell, C. R. (2014). Economics: Principles,Problems & Policies.
McGraw-HIll Education.
MIller, R. L. (2017). Economics Today (19 ed.). Pearson.
O'Sullivan, A. (2005). Economics:Principles in Action. Prentice Hall.
Paul , R. W. (2015). Economics (4 ed.). Worth Publishers.
Sowell, T. (2014). Basic Economics (5 ed.). Basic Books.
Suranovic, S. (2010). International Trade : Theory and Policy. Washington:
Saylor Foundation.
Tucker, I. B. (2016). Macroeconomics for Today (9th ed.). South Western
College.
Tyler , A. T. (2014). Modern Principles:Macroeconomics (3rd ed.). Worth
Publisher.
William , T. C. (2012). Business Data Communication. Pearson.
Williamson, S. D. (2013). Macroeconomics (5th ed.). Pearson.