Macro-Economics and Market Structures
Economics is the study of giving an explanation on how affluent a country is, the distribution of resources that have limited supply and how a replacement can be made, and other problems relating to the needs of humans to ensure complete fulfillment.
Due to the diversity and complexity of economics, it has been split into two parts, macro-economics and micro-economics. Macro-economics is known for looking at the economy has a whole and focusing on the more important issues we face today such as monetary/fiscal policies and the reason for inflation rates and employment as well as many other relevant topics. From this particular area of economics, I will be discussing the main characteristics of the main market structures. A market structure is defined as a way of categorizing the market in relation to the degree of competitiveness. This takes place based on the price and nature of the market between companies trading within the same market. The level of competition is prone to change throughout the different types of markets in terms of their strength in the market and the strategy they use to maintain their position as a market leader.
Market structures are known as a feature in the study of economics and can determine which company has market power- defined as a firm being able to have an impact on the selling price of the good or service, and has an effect on the behaviors of the firms in the same competitive market as well as the impact they have within society.
To ensure all firms are represented within a market structure they have been categorised into three sectors. These are perfect competition, oligopoly, and monopoly. All the structures have distinct characteristics that allow for them to have an induvial purpose. Perfect competition is made up of a theoretical structure which can be distinguished by its many attributes. These attributes all must be met to ensure they fit the correct criteria is met. The criteria includes many firms in the sector and none of which are of a large scale; this refers to the idea that in one particular market there is no dominant firm instead many smaller firms, firms are able to enter and exit the market on their own accord; this means firm is allowed to have the freedom to come in and out the market at their leisure, firms in this particular structure all produce products of a similar nature; the products are classified as undifferentiated, and where all firms are price takers; this relates to firms not having control over their selling price as they have similar products to competitors and base their prices and the level of supply and demand. The characteristics that they must meet are harsh, therefore only a small amount gains success when trading. The market which is most likely to gain success within the perfect competition is farming, for example, fresh fruit. Even though the perfect competition is put under criticism for the unrealistic expectations it's still vital in interpreting economic facts and policies. An advantage of using the perfect competition structure is the firms don’t need a large amount of expenditure for advertising and branding of their products as all products sold in that market are standardized therefore money can be spent in an area that’s needing improvement to gain maximum success. Also, customers seek the benefit of a firm using this method because the firm is constantly in competition meaning a low price is set to make the product more affordable and accessible for consumers. However, a disadvantage for the firm is employees could become demoted as there are no incentives as there is a fixed price to ensure their competitiveness.
The next market structure I will be discussing in monopoly. A monopoly is described to be the sole supplier of the good/service to the market. To give a clearer understanding the firm must be in a dominant position and in the UK, firms must control more than 25% of the market share to be recognized as a monopoly structure. An example who a company who operate under this structure is who have 90% of the search engine market share. There are requirements a firm must make before being considered for this market structure. The main three are high barriers to entry; this means it is more difficult for a firm to enter this market due to expensive start-up costs or other obstacles such as legal restrictions, and profit maximization; as this market has little competition firms are likely to set a high selling price as they don’t have any price wars this, therefore, allowing them to aim for profit maximization and price maker; the firm is able to choose their selling price for the desired good or service by looking at their sales. An advantage which is linked to being part of the monopoly structure is they can achieve economies of scale, this is when companies are able to decrease their expenditure due to a large scale of production, e.g., buying stock in bulk could lead to a discount being given by the suppliers. Another advantage could be that as there is no competition, firms are more likely to try and be creative with new products as they have the funds generated through profits. This could also be a benefit to the consumer as they are getting a large range of product choices. However, a disadvantage could be that as the firm is setting the selling price it could be difficult for the consumer to afford it reducing the amount of purchases the company is receiving.
Oligopoly is the final market structure, it is dominated by a minority of firms who have market power and are known to have a significant impact on each other’s businesses in relation to price. Like all others, each structure has a specific feature which distinguishes it from the others. For oligopoly there is two stand-out characteristics, these being barriers to entry; in this sector, there are barriers in place to restrict the entry of new firms but not completely as they are known for having a healthy level of competition within the structure. Oligopoly’s level of barriers differs between the companies some have easy access whereas in others entrance doesn’t occur. The other characteristic is the interdependence of the firms; the essence of this structure is each firm must consider their actions and how that could impact on their few competitors. They also have to be aware of how their competitor's strategies have a positive impact on their firm and give them the competitive edge, leaving you to have to react quickly and adapt. An advantage of oligopoly for consumers is due to the lack of firms they can compare the prices easily and get the best option for themselves, as well as firms, will be constantly lowering their prices to stay active which also benefits the consumers. Whereas a disadvantage is smaller firms will find it difficult for themselves to try and become recognized as the larger firms are more dominant statues.
An industry that is impacted by their market structure and then has a knock-on effect on their product range and price is the fast-food industry. This industry is large recognised globally with stand out companies such as McDonalds, KFC, Burger King naturally making them an oligopoly market structure due to their attributes. Due to the competitive nature of the fast-food industry, all companies sell the same, if not similar products, for example, all Mcdonald's and Burger King both sell a standard cheeseburger but to try and gain uniqueness Mcdonald's created their own range with products known as Big Mac burgers. Each of the chain’s product similarities continue to arise as there are set products that you can’t change, one being a chicken nugget sold by all 3 chains. A key attribute of the oligopoly market is interdependence, and this has a major impact on this industry as all the decisions made must be strategic so they can predict the movements of competition. One way in which they do this is by price, as they are al closely compared consumers base their decision on who to eat with pending on their price. This resulting in a competitive pricing strategy being but in place to encourage sales. These companies are also known for having products placed on a discount menu for foods you could eat quickly on the go without costing too much.
In conclusion, market structures are relevant in today’s economy especially for existing or starting up firms in today’s market. The specific requirements each structure must meet allow for a fairer market and can allow the business to grow and improve benefiting both their firms and the consumers in the market.
- BusinessDictionary.com. (2019). Which of your friends needs to learn this term?. [online] Available at: http://www.businessdictionary.com/definition/economics.html [Accessed 19 Feb. 2019].
- Courses.lumenlearning.com. (2019). Introduction to Monopoly | Boundless Economics. [online] Available at: https://courses.lumenlearning.com/boundless-economics/chapter/introduction-to-monopoly/ [Accessed 19 Feb. 2019].
- Economicshelp.org. (2019). [online] Available at: https://www.economicshelp.org/microessays/markets/monopoly/ [Accessed 19 Feb. 2019].
- Gallego, L. (2019). Market structures | Policonomics. [online] Policonomics.com. Available at: https://policonomics.com/lp-market-structures/ [Accessed 19 Feb. 2019].
- Sloman, J., Wride, A. and Garratt, D. (9). Economics.
- Lombardo, C. (2019). The Advantages and Disadvantages of Ogligopoly | Samsung Galaxy Blog. [online] Thenextgalaxy.com. Available at: https://thenextgalaxy.com/the-advantages-and-disadvantages-of-ogligopoly/ [Accessed 20 Feb. 2019].