Question

Microeconomics:

No copy from internet or slides is allowed

a. Explain the different types of market structures using both graphs and verbal explanations. Provide a specific example of each market.
b. Why monopolies arise and what governments can do in the face of monopolies?

Answer 1

a. There are four main types of market structures which are Perfect Competition, Monopoly, Oligopoly, and monopolistic competition.

Under Perfect Competition: There are several types of firms with perfect information and normal profits. Any number of firms can enter or exit the market. There is perfect information which leads to homogenous goods. Thus in this Average revenue is equal to marginal revenue and marginal cost. Biscuit sellers, grocery brands which sell at the same price.

Monopoly: One firm holds most of the market share with barriers to entry. The firm charges a higher price than the competitive price as it holds the largest share in the market and there is no other major player. It has economies of scale as there is almost nil competition, the firm has a moat around itself which prevents other firms from entering into the business. Super normal profits as Average revenue AR is higher. Cable TV and Tap water services.

Oligopoly: In this market structure, few firms dominate the market and there are some barriers to entry, with interdependence between the firms. Price is up and the few firms have a greater share of profits. Crude oil players and specific industry such as sports.

Monopolistic competition: There are several firms with brand loyalty with low barriers to entry, firms produce differentiated products and as there are several firms there is less profit than in monopoly. Movies makers and publishers.

b. Monopolies arise because they have a moat around them such as barriers to entry, imperfect competition, wherein there is a huge capital required such as for Satellite TV's, airline industry. Governments can regulate the prices by setting a price floor if the prices are too high, or they can bring out a public firm which is a competitor so that the services are availed to the public at a cheaper price, while higher income earners and avail the private firms services which are at a higher cost. Governments can also reduce barriers to entry and make credit availability easy so that more firms turn up in the industry which reduces monopoly.