( Market Structure) Define market structure. What factors are considered in determining the market structure of a particular industry? Market Structure is defined as the important features of a market.
Market structure refers to interconnected market characteristics, either competitive or organizational, that describes betell the competitive nature and pricing policy that a market follows ( Francois & Wooton, 2010) . The market structure is majorly determined by:
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The number of sellers and buyers that operate in the market.
The nature of goods or services that the firms operating in the market offer.
The company’s concentration ratio.
A market’s entry and exit barriers.
The market’s economies of scale.
The market’s degree of vertical integration.
The market’s customer turnover.
The market’s level of products and services differentiation.
Thus the market structure is a crucial feature of the market as it influences the supplying and pricing of a firm’s goods and services, how the entry and exit barriers are handled, the degree of efficiency of a firm’s business operations ( Nyborg, 2019) .
(Perfect Competition Characteristics) Describe the characteristics of perfect competition.
Numerous sellers and buyers : a perfect competition involves a large number of sellers as well as buyers of a particular commodity, such that a single seller will supply a very small proportion of the entire market’s output, and a single buyer will consume a very small proportion of the market’s supply.
Homogenous or identical products : all sellers in a perfect competition supply similar/identical products. That is, the products are the same amongst all the competitive firms.
The market supply and price are not controlled by an individual : because no single firm’s variation in supply can bring about a significant change in the market, and therefore cannot influence the market price. as such, a competitive firm is not often described as a “price-maker”, but a” price-taker”.
No buyers’ preferences: the buyer does not have a preference over a particular seller’s product in a perfect competition markets. This is because all sellers supply the same product and the buyers can buy from any supplier.
Perfect Knowledge: both the sellers and the buyers of products have full knowledge concerning the market’s prevailing market’s price.
Perfect Factors Mobility : there is free movement of production factors like capital and labor into and out of the industry in a market that is perfectly competitive.
Free Market Entry and Exist : a perfectly competitive market allows free market entry for new firms and exists of the existing firms at will ( Nyborg, 2019)
(Demand under Perfect Competition) What type of demand curve does a perfectly competitive firm face? Why?
A perfectly competitive market experiences an infinitely elastic demand curve, which graphically means a horizontal line because the price is constantly equal for all the products in the market and the buyer will only decide depending on the quality of the product.
(Short-run Profit Maximization) A perfectly competitive firm has the following fixed and variable cost in the short run. The market price for the firm's product is $150.
Output FC VC TC TR Profit/ Loss
0 $100 $0 100 -100
1 $100 $100 200 -50
2 $100 $180 280 20
3 $100 $300 400 50
4 $100 $440 540 60
5 $100 $600 700 50
$100 $780 880 20
Complete the table.
At what output rate does the firm maximize profit or minimize loss?
The firm realizes its maximum profit at the fourth unit of output with $ 60
What is the firm's marginal revenue at each positive level of output? Its average revenue?
The marginal revenue is equal to the average revenue at every level of output. the subsequent output level’s average revenue is as shown below:
Level of output average revenue
NIL
150
150
150
150
150
150
What can you say about the relationship between marginal revenue and marginal cost for output rates below the profit-maximizing (or loss minimizing) rate? For output rates above the profit-maximizing or loss minimizing rate?
Marginal Revenue is equal for each and every level of output. However, the marginal cost increases for subsequent levels of output.
(Minimize Loss in the Short Run) Explain the different options a firm has for minimizing losses in the short run.
In the short run, the price is lower than average total cost, it can minimize losses when it still produces at marginal cost is equal to marginal revenue. (MC=MR).
In the short run, making the price of the product always higher than the average variable cost.
In the short run, existing or shutting down the business when a price of goods goes down below the average variable cost ( Nyborg, 2019) .
(Short-Run Loss) Suppose a firm decides to shut down in the short run. What is the resulting loss?
The firm would only loose the fixed cost if it decided to shut down in the short run as zero output in the firm implies zero variable cost.
(The Short-Run Firm Supply Curve) Use the following data to answer the following questions below:
Q VC MC AVC 1 $10 10 10 2 $16 6 8 3 $20 4 6.67 4 $25 5 6.25 5 $31 6 6.2 6 $38 7 6.33 7 $46 8 6.57 8 $55 9 6.875 9 $65 10 7.22
Calculate the marginal cost and average variable cost for each level of production.
How much would the firm produce if it could sell its product for $5? For $7? For $10?
Four units of the output would be produced if the firm sold its products for $5 because the marginal cost, which is equivalent to the price, is $5 ( Francois & Wooton, 2010).
Six units of the output would be produced if the firm sold its products for $7.
Nine units of the output would be produced if the firm sold its products for $10.
In short, MC=P
Assuming that is fixed cost is $3; calculate the firm's profit at each of the production levels determined in Part (b).
P=MC is the condition of maximizing the profit, and an increase in the firm’s prices increases its output.
If FC=3;
TC=VC=FC
P=5 when Q=4; but = PQ-TC
Thus; 5(4)-(25+3)
= 20-28
= -8
If P = 7 and Q = 6; π = 7(6) – (38+3)
= (42 – 41)
= 1
And if P =10 and Q = 9; π = 10(9) – (65+3)
= 90 – 68
= 22
(The Short-Run Firm Supply Curve) Each of the following substitutions could exist for a perfectly competitive firm in the short run. In each case, indicate whether the firm should produce in the short run or shut down in the short run, or whether additional information is needed to determine what you should do in the short run.
Total cost exceeds total revenue at all output levels.
The firm ought to shut down its production in the event that the price level goes below the average variable cost to avoid unnecessary losses.
Variable cost exceeds total revenue and output level.
Production must be shut down in the event that the variable cost of a firm exceeds the total revenue as well as output level.
Total revenue exceeds fixed cost at output level.
The firm should consider continuing its production if the total revenue collected exceeds the variable cost.
Marginal revenue exceeds marginal cost at the current output level.
The firm ought to increase its production as long as the marginal revenue exceeds the marginal cost, so long as the additional units of output contribute additional revenue compared to the total cost but stop expanding its production before the marginal cost goes beyond the marginal revenue.
Price exceeds average total cost at all output levels.
If the price of the product exceeds the average total cost at every level of output, then the firm should consider expanding its level of production ( Francois & Wooton, 2010) .
Average variable cost exceeds price at all output levels.
The firm will eventually shut down its production in the event that its average variable cost exceeds the price at every level of output.
Average cost total cost exceeds price at all output levels.
The firm will continue operating for a short-run, but will eventually shut down its production in the event that its average cost exceeds the price at every level of output.
References
Francois, J., & Wooton, I. (2010). Market Structure and Market Access. World Economy, 33(7), 873-893. https://doi.org/10.1111/j.1467-9701.2010.01234.x
Nyborg, K. (2019). Humans in the Perfectly Competitive Market: Report from a Fictional Field Study. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3369164
