The types of Markets.
The following notes are the basic concepts in the mainstream (Capitalistic, neo-classical) Economics.
- A large number of sellers and buyers
- Homogeneous products
- Freedom of entry into and exit from the market
- Suppliers are price takers
- Price (P) = Marginal Revenue (MR)
- Extra revenue of an additional unit is the same as the current price
- Long-run Equilibrium
- Companies earn normal profits
- P = MR = MC (Marginal Cost) = AC (Average Cost)
- The perfectly competitive market will be efficient regarding resource allocation and productivity.
- Companies produce products at the minimum of Average Costs (AC) curve – lowest unit cost possible – and there is no waste of resources.
- Pure monopoly: a single company has 100% of market share
- More generally, a monopoly exists when a single company dominates a market.
- There is a barrier to entry.
- The company is a price maker.
- Marginal Revenue (MR) is a downward-sloping, and the MR curve is below the demand curve. In this condition, to sell more, the price must be lowered for all units.
- The product output (Q) is determined when MR and MC meet, where the profit is maximized. (MR = MC)
- At this point, the price is higher, and the quantity is smaller than the market equilibrium.
- The company makes an abnormal profit because the price is higher than the average cost (P > AC)
- The monopoly market is allocatively / productively inefficient.
- Consumers pay more
- The company does not use its resources fully because it does not operate at the most efficient output level
- Companies in monopoly might not be innovative (less R&D spending and fewer new products).
- A few companies dominate the market.
- Not easy for a new company to enter the market
- Collusion: Major companies join together (a cartel) and act as if they were a monopoly
- Competition: A small number of companies compete with each other
- In a competitive oligopoly, the price tends to stick as it is.
- If one company raises the price => others will remain the same => the demand will fall as the revenue
- If one company lowers the price => others will follow => no change of market share and the revenue of all companies will fall
- Therefore, the price competition is not common, and rather companies prefer differentiation (branding and marketing)
- Collusion can be explicit (OPEC) or implicit (Price leader)
- The market works like a monopoly
- Price is set above the Average Cost (AC)
- Quantity is less than the equilibrium
- The market is allocatively / productively inefficient.
- Some companies might cut the price temporarily to drive other competitors out of a market.
- Customers might benefit the low price in the short term, but in the long term, winning companies may exploit the market with the power of monopoly.
- Similar to perfect competition
- Many buyers and sellers
- Easy entry and exit
- Differentiated products rather than the homogeneous products
- Like Monopoly, Marginal Revenue (MR) is downward and below the demand curve.
- In the short run, the output is set when MR equals MC. And the price is set above the average cost (P > AC) => Abnormal profits
- Unlike Monopoly, the entry is allowed. In the long run, the demand and price are adjusted until normal profits are made.
- In the monopolistic competition, many companies can get abnormal profits until it is stabilized. Therefore, the market, in general, is allocatively (P>MC) / productively (P > AC) inefficient.