In the present day and age, several market structures are existent in the global economy. Each and every market structure is distinct in its way of being run and the power that it has over market prices, trend setting and demand. The key element that helps in distinguishing between different market structures is mainly the amount of competition present between several producers of a single type of product. In this paper, the characteristics and means of maximizing profits alongside the barriers to enter the market will be seen and the role of each structure in an economy will be explained.
Markets in which there is a high amount of competition (mostly referred to as competitive markets) are such that no single producer or consumer has the ability to alone influence the price of products in them. This means that if a producer tries to exploit consumers by raising its prices to a range that doesn't match the general price of the product, consumers will switch to buying the product from another of the infinite producers present in the market. Similarly, if a consumer tries to bargain and purchase a product at a lower price, he will not be successful in doing so because of an infinite number of other people willing to purchase the product at the chosen price. Most producers provide the same kind of good or service and generally, everyone is well-aware of the prices and quality of commodities. Also, in such a market, it is fairly easy for a person willing to produce a product to enter or exit, since there are no barriers in doing so.
In a competitive market, prices of commodities are determined by finding the equilibrium of the market's demand that is the willingness for people to purchase goods at a certain range of prices, and the market's supply, that is the willingness of producers to supply a good at a range of prices. The point of equilibrium of these two is known as the market equilibrium price. (Grant, 2008)
When it comes to the determination of the kinds of products to produce, producers are usually signalled to switch production from one commodity to another through the changes in prices. Wherever it is observed that the prices and profits earned are high, production is quickly switched into the making of that commodity. When prices are falling, the amount of output being produced is reduced. As a whole, the prices are similar in a competitive market, and the only way to increase profits is by reducing the costs of production and keeping the price constant, or by reducing the price of a commodity in such a manner that the price cut is not matched by any other producer. In this way, sales and profits may increase. However, usually, if a single firm increases its profits because of the introduction of a new method of production, the method is soon revealed to other producers as well. Thus, in a competitive market, such situations of thriving are mostly short lived.
Competitive markets play an important role in an economy. It is obvious through the information given above that a single producer cannot alone influence the market price, and there is always a battle of gaining a relatively higher market share by keeping prices the lowest. Therefore, this kind of market structure does not allow unnecessary profits to be made by producers, meaning there is an efficient use of scare resources. Also, whenever an increase in prices is observed, production is switched into the making of that commodity almost immediately and in this way, prices remain low due to the high amount of competition.
It is not incorrect to say a monopolistic market structure is perhaps the complete opposite of a competitive market structure. A monopoly exists when there is only one producer of a good, who has a high proportion of the market share. This one producer has complete power to set the price at its own will and because of the lack of other producers in the market, consumers have no other choice but to accept the price given to them for the purchase of that commodity.
A monopoly usually produces goods and services in bulk and therefore achieves internal economies of scale,…