Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Thursday, 31 May 2012

Market Structure: Introduction


This topic discusses all the theories about different markets. Different markets will make different decisions on the determination of quantities and prices. In this topic, we will discuss the characteristics of each market. We discuss how the determination of the profits in the short and long term.  

Market is an arrangement that facilitates the buying and selling of a product, service, factor of production or future commitment. Or in other words, a market is a place where the buyers and sellers meet one another to transact business.

Market structure refers to the number and distribution size of buyers and sellers in the markets of particular goods and services. Market structure divided to perfect competition, monopolistic, monopoly and oligopoly.  

Profit maximization in perfect competition market 

Market equilibrium is achieved when the marginal cost equal to marginal revenue. Price is determined based on the average revenue. Prices are fixed in perfect competition, so marginal revenue is still the same results at a price.


P = AR = MR

Although, in the imperfect competition such as monopolistic, monopoly and oligopoly the market equilibrium achieved when marginal revenue equal with marginal cost. Price is different based on quantity supplied.


P = AR

A firm in the short-run will possibly enjoy three types of profit. The possibilities are:

a.                  Supernormal profit
The profit earned when total revenue is greater than total cost. It also realized when the price is greater than average total cost. 

b.                  Subnormal profit
Economic losses are the losses incurred because the price is lower than the average total cost or when total revenue is less than total cost. 

c.                   Normal profit
Normal profit or breakeven is the profit necessary for a firm to stay in business. Normal profit is when total revenue is equal to total cost and where no profit or loss is incurred.