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Market Structure Paper August 2, 2009 In this paper I will discuss competitive markets, monopolies, and oligopolies and what role each of these play in an economy? I will also point out: o What the characteristics of each market structure is? o How the price is determined in each market structure in terms of maximizing profits? o How output is determined in each market structure in terms of maximizing profits? o What are the barriers to entry, if any? o What role does each market structure play in the economy?

First I would like to discuss what a competitive markets is. This market has a large number of buyers and sellers, such that no single buyer or seller is able to influence the price or control any other aspect of the market. That is, none of the participants have significant market control. A competitive market achieves efficiency in the allocation of scarce resources if no other market failures are present. (AmosWeb) Usually the competitive market does very well because demand price and supply are price equal.

The demand and supply prices cannot generate any greater satisfaction by producing more of one good and less of another. (AmosWeb) People want good products and they want what they pay for. I would be willing to spend hundreds on hair supplies as long as the products are good. If a product does not really provide the satisfaction you are looking for then you want to pay little or nothing for it right? In this type of market you would see products on demand like lunch meat at Wal-Mart people want it and they want it to taste great, but they want it at an everyday low cost.

A perfectly competitive market may have several distinguishing characteristics, including: Many buyers/Many sellers- many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price. Low- Entry/Exit barriers Perfect Information Transactions are costless Firms Aim to maximize profits Homogeneous Products- The characteristics of any given market good or service do not vary across suppliers. provided by Wikipedia) The importance of a perfect competition derives from the fact that price taking by the firm guarantees that when firms maximize profits (by choosing quantity they wish to produce, and the combination of factors of production to produce it with) the market price will be equal to marginal cost. (Wikipedia) For example if a television store wanted to expand then all their sales and profits for how ever long would include the cost of expanding. A firm will determine the price and output level that returns the greatest profit.

Profit has to equal revenue but minus the cost. A completive market has to reach a point where marginal revenue equals marginal cost. There are two groups fixed cost and variable cost. Fixed cost are business expenses like rent or company vehicles. A variable cost is a unit-level cost because it can vary with the number of units produced. Barriers of entry: ?(1000 Ventures) This system tries to scare off new competitors from entering the market. Maximizing Profits in Market Structures


1. Choose two of these situations and explain whether it would be beneficial to a) raise prices or b) lower prices for this good or service in order to increase the producer’s revenue. Explain your prediction with reference to price elasticity of demand.
a. new living room sofa
b. fees at a community college
c. fresh tomatoes at the grocery store
d. Covid home test
e. a day at a spa
2. Identify each of the following as having a price elasticity of demand greater or less than one and explain why.
Fees to attend community college
Electricity service to your home
Meal at a restaurantGas for your carFresh tomatoesNew Toyota Camry
Identify each of the following as having an income elasticity of demand greater or less than one and explain whyRestaurant meals
Airline travel
Hamburger meat
Local bus travel
Attending private high school
Books needed for a college course
Identify the following pairs of goods as having a positive or negative cross price elasticity of demand and explain why
Razor blades and razors
Ink cartridge and printer
McDonalds hamburgers and Burger King hamburgers
Attending GCC and UCLA
3. Given the following bids to buy used textbooks to a market, calculate the price elasticity of demand between prices $20 and $30. Please show your work
Each of the following is the maximum price a buyer is wiling to pay for the book. $15 $15 $15 $20 $20 $20 $25 $25 $30 $30
4. For gasoline, there is a low price elasticity of demand but a high income elasticity of demand. For the future that could create problems for climate change. Explain why this might be true.