Question

This assignment is aligned to these course outcomes: Explain economic principles and their applications in the real world. Summarize the different types of market structures and the role of government in economics. In the workplace, we are often asked to create “briefs.” A brief provides a snapshot, or short, written summary, of a situation or event that has occurred. It is generally just a few pages long and may include additional visuals like a graph, chart, or table. In this assignment, write a brief about economic concepts in an industry that interests you.

Answer 1

There are quite a few different market structures that can characterize an economy. However, if you are just getting started with this topic, you may want to look at the four basic types of market structures first. Namely perfect competition, monopolistic competition, oligopoly, and monopoly. Each of them has its own set of characteristics and assumptions, which in turn affect the decision making of firms and the profits they can make.

Perfect Competition

Perfect competition describes a market structure, where a large number of small firms compete against each other. In this scenario, a single firm does not have any significant market power. As a result, the industry as a whole produces the socially optimal level of output, because none of the firms have the ability to influence market prices.

Monopolistic Competition

Monopolistic competition also refers to a market structure, where a large number of small firms compete against each other. However, unlike in perfect competition, the firms in monopolistic competition sell similar, but slightly differentiated products. This gives them a certain degree of market power which allows them to charge higher prices within a certain range.

Monopolistic competition builds on the following assumptions: (1) all firms maximize profits (2) there is free entry and exit to the market, (3) firms sell differentiated products (4) consumers may prefer one product over the other. Now, those assumptions are a bit closer to reality than the ones we looked at in perfect competition. However, this market structure will no longer result in a socially optimal level of output, because the firms have more power and can influence market prices to a certain degree.

Oligopoly

An oligopoly describes a market structure which is dominated by only a small number of firms. This results in a state of limited competition. The firms can either compete against each other or collaborate (see also Cournot vs. Bertrand Competition). By doing so they can use their collective market power to drive up prices and earn more profit.

Monopoly

A monopoly refers to a market structure where a single firm controls the entire market. In this scenario, the firm has the highest level of market power, as consumers do not have any alternatives. As a result, monopolies often reduce output to increase prices and earn more profit.

The following assumptions are made when we talk about monopolies: (1) the monopolist maximizes profit, (2) it can set the price, (3) there are high barriers to entry and exit, (4) there is only one firm that dominates the entire market.

In a capitalist economy, the main responsibilities performed by the government are as follows:

a. Developing and sustaining the free market mechanism system

b. Eliminating any kind of restrictions on the working of free competitive market

c. Increasing the effectiveness of free competitive market system through various measures

In a socialist economy, the function of government is entirely different from the function of government in a capitalist economy. In a capitalist economy, the government acts as a regulatory and complementary body. On the other hand, in a socialist economy, the government plays a comprehensive role in almost all economic activities, such as production, distribution, and consumption, of a nation. In a socialist economy, not only the ownership of private property is allowed to a limited amount, but the concept of free market mechanism is also eliminated.