Chapter 9, Problem 1AA

To determine

To explain: Market Structure and its characteristics.

Explanation of Solution

There are number of factors on which the market structure depends namely: number of buyers and sellers, entry- exit barriers in the market, nature of the product, etc. Before any decision making, a detailed market analysis is conducted to get the required information which in turn, is used to determine the market structure in which the product will enter.

Perfect competition is the market where there are huge number of buyers and sellers in trade of homogeneous products. There are no entry and exit barriers which means that when the industry is earning profits, some new firms can enter the market lured by such profits without any restrictions and at the same, if the industry is facing losses, the firms are easily allowed to leave the market.

Monopoly refers to the market structure where there exists only a single seller for specific product or service and he controls the sale of the product and service. Since there exists only a single seller, the seller enjoys the power to determine the prices of the products or services sold by them.

Oligopoly is the type of market structure in which there exists lesser number of sellers and thus all of them exercise a significant influence in the market. It is a kind of imperfect competition.

Monopolistic competition, also known as imperfect competition, is a market structure that contains both the aspects of oligopoly and perfect competitive markets. In a monopolistic competition, there exists no entry and exit limitations for the firms just as in perfect competitive market, but the products are differentiated as in oligopoly.

Cartel is an arrangement amongst the manufacturers to reduce competition by controlling price, production or distribution of products and services.

Since, cartels reduce competition, they enjoy monopoly power and products can be sold at high prices so as to bag big profits.

One of the biggest obstacles that a firm usually face in a market is entry of new competitors in the market. Under the monopoly market, the firm is protected as there are several restrictions that have been imposed on the entry of the new firms in the market. Often a times, state laws prevent the new entries or sometimes huge initial capital investment discourage the competitors to enter the market.

Economies of scale refers to the advantages that firms acquire due to the scale of operation i.e. the firms can manufacture huge amounts of products and services at a low cost. It implies that with increase in the output produced, the cost per unit decreases.

Economics Concept Introduction

Introduction: Market structure determines the essence and scope of competition in the market for products and services.