Principles of Microeconomics: Market Structures and Analysis

This report provides a comprehensive overview of microeconomic market structures, including perfect competition, monopoly, monopolistic competition, and oligopoly. It details the characteristics of each market type, such as the number of buyers and sellers, product differentiation, and entry barriers. The report analyzes the influence of high entry barriers on market profitability, comparing outcomes for sellers and buyers in different structures. It examines product elasticity, the role of government, and the impact of international trade. Real-life examples are used to illustrate the concepts, and the report concludes by summarizing the key differences and implications of each market structure, making it a valuable resource for understanding microeconomic principles.

Running Head: PRINCIPLES OF MICROECONOMICS
Principles of Microeconomics
Name of the Student
Name of the University
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Table of Contents
Introduction......................................................................................................................................2
Perfect Competition.........................................................................................................................2
Monopoly.........................................................................................................................................3
Monopolistic Competition...............................................................................................................3
Oligopoly.........................................................................................................................................4
Influence of high entry barriers.......................................................................................................4
Preferable market for seller.............................................................................................................9
Preferable market for buyers...........................................................................................................9
Elasticity of products in different market........................................................................................9
Role of government.......................................................................................................................10
Effect of international trade...........................................................................................................10
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Introduction
Market in general refers to a place where there are different sized shops with large and
small sellers selling different types of goods. However, while consider in terms of economics
market definition is not limited to any particular place. It is not always required for the parties to
come in physical contact. Henceforth, in economics the concept of market is used in a
specialized and typical sense. It is not confined to a fixed location. The four main types of
market are perfect competition, monopoly, monopolistic competition and oligopoly. Each has
their own features. The paper briefly describes each of these market structures with reference to
real life examples. Depending on respective features, some markets are favorable for sellers
while some are preferable for buyers. Market differs in terms of elasticity of products sold in the
market, profitability in the market and other aspects as well.
Perfect Competition
Perfect competition is a market structure where numerous buyers and sellers are selling a
homogenous product. Followings are the main features of perfectly market. There is large
number of buyers and sellers in the marketplace. The sellers in the market sold an identical or
homogenous product. Any new firms can freely enter the market and existing sellers can leave
the industry if found it unprofitable (Frank, 2014). The participants have perfect set of
information and possess complete knowledge about the market. All the factor of production are
perfectly mobile.
Due to the presence of large number of buyers and sellers in the market, it is not possible
for any single buyers or sellers to influence price or quantity. Hence, firms are price takers in the
market. The demand curve faced by the firms is perfectly elastic in nature and is a horizontal

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straight line. Because of fixed price, average revenue equals marginal revenue and both equals
price. The cost curves are of usual shape. Profit maximization in the short run requires marginal
revenue and marginal cost equals. In the short run, it is possible for competitive firms to enjoy
either abnormal profit, normal profit or loss (Fine, 2016). In the long run, the competitive firms
end up with only a normal profit. The firms in the long run operate at the minimum point of long
run average cost earning only normal profit.
The perfectly competitive market structure an extreme hypothetical situation. Food and
beverages industry resembles to perfectly competitive industry. In various industries, producers
have many firms competing with similar products (Baumol & Blinder, 2015). The market for
agricultural product is often take as an example of competitive industry.
Monopoly
Monopoly in a market where single seller supplies the entire market. There is no close
substitute of the product sold by the monopolist. Being the single seller the monopolists devices
complete control over price and quantity. There are strong entry barriers in the market. As the
monopolists determine price and quantity on its own, the demand curve is downward sloping
unlike competitive firms that face a perfectly elastic demand curve. The equilibrium in the
market is determined from usual profit maximization condition (Moulin, 2014). The monopolist
is able to maintain a above normal profit both in the short run and in the long run. Prices charged
in monopoly market is greater than the price obtained in competitive market while the
equilibrium output in monopoly is less than competitive output. An example of pure monopoly
market in United States is United States Postal Service.

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Monopolistic Competition
As the name suggests, monopolistic competition is a combination of perfect competition
and monopoly market and has characteristics of both the market. The firm in the monopolistic
competitive market sells a more or less similar product. The product is same in their basic
characteristics. Each seller differentiate its product by adding a different brand name, making the
package different or adding some features. Competition exists among the sellers. Each seller can
take their decision regarding their own brand and hence has a monopoly (Currie, Peel & Peters,
2016). The products sold in such market has a number of close substitute reducing the market
power of firms. In the short run, like competitive firms, they can enjoy abnormal profit, loss or
normal profit but in the long run there is only normal profit in the industry. For example,
restaurants and professional services.
Oligopoly
Oligopoly is a form of imperfectly competitive market with dominance of a few sellers. If
the few sellers sell homogenous product then it is called pure oligopoly. In a differentiated
oligopoly, firms sell a differentiated product (Kolmar, 2017). For examples- The four dominating
manufactures in the primary breakfast cereals are Kellogg, General Mil, Post and Quaker
forming oligopoly in the market.
Influence of high entry barriers
In the competitive market, there are nor barriers to entry and exits. New firms when find
a market profitable enter in the market. In times of economic loss, firms leave industry. The free
entry and exit mechanism in the competitive industry reduces any abnormal profit or loss in the
long run resulting only in a normal profit (Rader, 2014).

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Figure 1: Long run profitability in competitive industry
(Source: as created by Author)
Suppose, the competitive firm enjoys a short run profit by charging a price P and selling
quantity q. The profit enjoyed by this firm attracts other firms to join the industry. When new
firms join the industry, total quantity supplied in the industry increases. As a result, the industry
supply curve will shift to the right reducing price in market. The low price reduces profit and
new firms stop entering (McKenzie & Lee, 2016). This happens at the minimum point long run
average cost. Competitive price in the long-run always equals minimum average cost. The
minimum point of average cost indicates productively efficient point. Therefore, firms in the
competitive industry.
In the competitive industry, firms even suffering from loss continue their operation up to
a certain point. Loss is incurred once total revenue fall short of total cost. After incurring loss,
firm continue to operate in the market as long as some part of the fixed is recovered. At price
equals minimum point of average cost normal profit (Bernanke, Antonovics & Frank, 2015).

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This is known as break-even point. Below this point, firms continue production until the
minimum point of average variable cost. For price even below minimum average variable cost,
the loss making firms stop producing. This is the shut-down point.
As like perfect competition, in the monopolistically competitive market there are almost
no barriers or lower barriers to entry. In monopolistic competition, firms in the short run can
enjoy a supernormal profit. The profit prospect in the industry attracts new firms. The entry of
new firms make firms make the demand more elastic (Friedman, 2017). New firms continue to
enter in the market unless profit reduce to only a normal profit. Therefore, both competitive
firms and monopolistically competitive firms enjoy only normal profit in the long run. However,
there is a different in market outcome. Under, monopolistic competition firms do not continue
operation until the minimum point of operation. The long run equilibrium point is determined
from the tangency between the demand curve and average cost curve. Firms enjoy a greater cost
efficiency as they operate at the falling part of average cost indicating an increasing return to
scale. Monopolistically competitive firms hold an excess capacity.
Figure 2: Long run situation under monopolistic competition

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(Source: as created by the Author)
In the monopoly market, the single firm enjoys a profit throughout the entire phase of
operation. The high entry barriers in the market helps to retain profit of the singe firm (Elsner,
Heinrich & Schwardt, 2014).
Figure 3: Long-term profitability of monopoly
(Source: as created by Author)
When a monopoly firm enjoy above normal profit in the short run, the new firms cannot
enter in the market. The high entry barriers allow the firms to charge a price above average cost
and enjoy a significant amount of profit. The shaded region in the figure shows long run profit
because of high entry barriers.
A few large firms dominate the oligopoly market. High concentration of market share in
the hands of few large firms works as natural entry barrier. Stronger the entry barriers it is more
difficult for new firms to enter the market (Cowen & Tabarrok, 2015). With very restrictive

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entry, the oligopoly structure can take a monopoly structure if one firm dominates all others in
the industry. This takes firms closer to a point where it can enjoy an abnormal profit with
standard profit maximization.
Figure 4: Long run profitability under oligopoly
(Source: as created by Author)
In any form of imperfectly competitive market, firms try to make their product as much
different as possible from its competitors. In the monopoly, market presence of no close
substitutes help to retain the monopoly power and maintain a high profit. Entrepreneurs always
has incentives to develop a close substitute of the product sold under monopoly and enjoy a
considerable marker power. For perfectly competitive and monopolistically competitive market,
several close substitutes are already present in the market and hence firms have no incentive to
substitutes (Arrow, 2015).

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Preferable market for seller
Objective of the seller is to maximize profit. For a seller, the market that comes with
higher profit prospects is more attractive. In this sense, the monopoly market is more preferable
for selling products. In the monopoly market, the single seller enjoys all the market power. Firms
not only enjoy abnormal profit in the short run but also retain it in the long-run. The choice of
market new after monopoly is the oligopoly market. In the two other form of market though firm
can earn some profit in the short run but in the long run, there is only normal profit.
Preferable market for buyers
For a buyer, perfectly competitive market is the most preferable market. Competitive
market has both productive and allocative efficiency. Price always equal marginal production
cost. A socially efficient output is produced and buyers are able to receive socially efficient
output at socially efficient price. In any form of imperfectly competitive market, sellers have
some extent of market power (Hill & Schiller, 2015). Using the market power, sellers maximize
their profit as much as possible reducing surplus to the buyers.
Elasticity of products in different market
In a competitive market, every seller sell a homogenous or identical product. Firms face a
perfectly elastic demand curve. When one firms charge a high price, then buyers will not come to
this firm and shift their demand. A slight change in the price of the product changes its demand
largely. In monopolistic competition, as more and more firms enter the market the demand for
each firm become more elastic. In the oligopoly market, the market demand curve is kinked
shaped. In one part of the demand curve demand is elastic in nature while in other the demand
curve is inelastic (Dean, 2014). The firms in the oligopoly market, involve in a price war in the
elastic part of the demand curve.

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Role of government
In the competitive market, the market alone performs efficiently. There are no role of
government in the market. Although monopoly market is not socially desirable, however there
are situations in which government itself encourages the presence of a single seller in the market.
These are natural monopoly market. Public utilities, railway are some natural monopoly market.
In a monopolistic market, government can put regulation to reduce to protect the interest of
buyers. Price ceiling and price floors are some policy that government can use to control price.
Effect of international trade
International trade by opening new market avenues affects different market structure.
With perfect competition, trade expands competition and offers consumers a variety of goods to
choose. In a monopolist competitive market, international trade ensures a good quality of the
differentiated product. For oligopoly market, international trade comes with the effect of
increasing competition within the market and hence reduces price (Maurice & Thomas, 2015).
Trade in a monopoly market reduces distortion as new firms enter with huge capital investment.
Conclusion
Market in economics indicates an arrangement where selling and buying parties come in
contact to each other either directly or indirectly and exchange goods. The paper discusses
different market structure. In different market, the level of competition is different. High entry
barriers ensures a high profit. For seller, a monopoly market is always preferred while for buyers
competitive market is preferable. The need for government intervention is least in the
competitive market. For imperfect competition, government has some role to reduce distortion
arises from these markets. Finally, internationally trade through increasing access to a wider
market affect each of the primary market structure.

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References
Arrow, K. (2015). Microeconomics and operations research: Their interactions and
differences. Information Systems Frontiers, 17(1), 3-9.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill
Higher Education.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.
Currie, D., Peel, D., & Peters, W. (Eds.). (2016). Microeconomic Analysis (Routledge Revivals):
Essays in Microeconomics and Economic Development. Routledge.
Dean, E. (2014). Principles of Microeconomics: Scarcity and Social Provisioning.
Elsner, W., Heinrich, T., & Schwardt, H. (2014). The microeconomics of complex economies:
Evolutionary, institutional, neoclassical, and complexity perspectives. Academic Press.
Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.
Frank, R. (2014). Microeconomics and behavior. McGraw-Hill Higher Education.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
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Hill, C., & Schiller, B. (2015). The Micro Economy Today. McGraw-Hill Higher Education.
Kolmar, M. (2017). Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.
Maurice, S. C., & Thomas, C. (2015). Managerial Economics. McGraw-Hill Higher Education.

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McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs: The economic way of
thinking for managers. Cambridge University Press.
Moulin, H. (2014). Cooperative microeconomics: a game-theoretic introduction. Princeton
University Press.
Rader, T. (2014). Theory of microeconomics. Academic Press.