Type Of Markets And Their Characteristics

Outline:prices in the market
1)      Introduction-         perfect information whereby
2)      Marketi)        Supply and demandconsumers are producers are well informed about
(a)    Types of goodsavailable goods in the market and their prices
1. Normal goods- the law of demand applies-         no entry or exit barriers whereby firm
2. Inferior goods- as income increase demand declinescan freely enter and exit the industry
3. Giffen goods- as price increase demand also-         homogenous products and this means
increasesthat goods are not differentiated and therefore
(b)   Elasticity- a definition of elasticity and priceproducts are perfect substitutes
elasticity-         perfect mobility of factors of
1. Demand price elasticityproduction
2. Supply price elasticityii)       Types of markets(Edward Nevin, 161, McGraw Hill press)
(a)    Perfect competition- definition, characteristicsCost curves:
and cost curvesHaving determined the characteristics of the perfect
(b)   Monopolistic competition- definition,competitive market the following is a discussion of the
characteristics and cost curvescost curves faced by firms in perfect competition
(c)    Oligopoly – definition, characteristics andmarket: (Edward Nevin, 161, McGraw Hill press)
cost curvesThe above chart demonstrate the cost curve faced
(d)   Monopoly- definition, characteristics and costby a firm in a competitive market, the optimal
curvesproduction point will be at point Q where the marginal
3)      Market failure:i)        Definition ofrevenue curve intersects with the marginal cost curve,
market failure, sources and solutionstherefore the firm will produce Q quantities at price P.
4)      Public goods:(Edward Nevin, 161, McGraw Hill press)
5)      Government intervention:Monopolistic competition:
6)      SAFER - suggested area of further studyIn monopolistic competition we have many buyers and
7)      Conclusionsellers but products are differentiated. (McConnell and
8)      BibliographyBrue, 249, McGraw Hill press)
Running head: Type of Markets and TheirCharacteristics include
Characteristics-         many producers
Type of Markets and Their Characteristics-         products are differentiated
Name:-         no entry or exit barriers
University:-         perfect information
Instructor-         mobility of factors of production
Date:(McConnell and Brue, 249, McGraw Hill press)
Abstracts:Oligopoly:
A market is an important institution in an economyOligopoly form of market comprises of a few sellers
given that it facilitates trade and the allocation ofor firms, this form of the market has the following
resources. The paper discusses the market withcharacteristics: (Baumol and Blinder, 241, Blackwell
reference to the law of demand, consumer andpress)
producer surplus, types of markets, market failure,-A few producers:
public goods and government intervention. Evidence-Entry barriers: this refers to set barriers that do not
from the firms' cost curves shows that the perfectpermit other firms to enter the industry, these barriers
competitive market is the most appropriate form ofinclude
market, however market failure may occur and the-Homogenous goods or services
paper highlights the importance of government-Perfect information
intervention in eliminating negative externalities and the(Baumol and Blinder, 241, Blackwell press)
provision of public goods.Monopoly:
Introduction:This refers to a form of market where there exists
Markets in economics can be defined as a structureonly one producer in the market, in this case therefore
that has buyers and sellers whereby both goods andthe firm sets the price; (Walter Wessels, 404, Prentice
services are traded. (McConnell and Brue, 128,Hall)
McGraw Hill) the market is important in economicsThe following are the characteristics of a monopoly
given that it facilitates trade in an economy and thisform of market:
enables the distribution and allocation of resources.-         only one producer in the market
There are various forms of markets including-         the firm sets the price in the market
monopoly form of market, oligopoly, monopolistic-         entry and exit barriers
competition and perfect competition. All these forms(Walter Wessels, 404, Prentice Hall)
differ in their characteristics including the number ofThe following shows the cost curves of the
producers and how prices are determined in themonopolistic firm:
market.  (McConnell and Brue, 128, McGraw Hill press)The above diagram shows the cost curves of the
Supply and demand:monopoly firm, the firm will charge a higher price P and
In perfect competitive markets the price is determinedthe quantity produced will be less than in the case
by supply and demand forces, supply refers to thewhere we have a perfect competitive market.
quantity produced and demand refers to the quantity(Edward Nevin, 199, McGraw Hill press)
consumed, when demand equals to supply, (BaumolMarket failure:
and Blinder, 61, Blackwell press)Market failure refers to a situation whereby the
The following diagram shows the market demand andmarket does not allocate resources effectively,
supply:market failure occurs due to various reasons which
From the above chart it is evident that the price andinclude imperfect information whereby consumers may
quantity is determined by the position of the supply andnot be aware of existing technology, advertisements
demand curve, the equilibrium price and quantity in thethat may mislead consumers and when producers are
above case will be P and Q respectively. (Baumol andnot aware of existing opportunities in the market.
Blinder, 61, Blackwell press)The chart also identifies the (Gregory Mankiw, 131, Prentice Hall)The other reason
consumer surplus and the producer surplus, consumerfor the existence of market failure is differentiation of
refers to benefit that the consumer receives at thegoods whereby products in the market are braded
given prices while producer surplus refers to theand have different prices, the consumer may
benefit received by the producer for selling at theassociate the price with quality and this may not be
given price. (Baumol and Blinder, 61, Blackwell press)the case applied by the producers. Market power is
In some cases some goods or services are taxed byalso a source of market failure whereby this may lead
the government, government taxes yield governmentto barriers to entry of firms and the existence of
revenue but lead to dead weight loss, this can bemonopolies that produce less than the market
defined as the benefit lost by both the consumers anddemands. (Gregory Mankiw, 131, Prentice Hall)
producer, (Gregory Mankiw, 155, Prentice Hall)The other reason why market failure occurs is the
The following chart demonstrates the impact of a taxexistence of external costs and benefits, this occurs
on quantity supplied the price, consumer surplus andwhen the production process leads to other external
producer surplus:costs or benefits that are not accounted for when
From the above diagram it is evident that the impactpricing goods and services, a good example is a
of a tax in a market will result into deadweight loss, thisproduction process that does not take into account
is the amount of benefit that is lost by the producerenvironmental degradation such as pollution. (Walter
and the consumer and is not recovered by theWessels, 532, Prentice Hall)
government. The price increases from p to p2 and theMarket failure can be resolved using various policy
quantity in the market declines from q to q2. (Gregorymeasures and they include taxation, in cases where
Mankiw, 155, Prentice Hall)the market leads to external costs then taxation can
Types of goods:be applied so that the price of goods and service
Normal goods:accounts for the negative externality. For positive
The law of demand states that when the price ofexternalities a subsidy can be offered. (Walter
good is reduced then the demand for that goodWessels, 532, Prentice Hall)The other policy measure
increases, however when the price of that good isis to prohibit the production of goods and services that
increased then the demand of that good declines.lead to negative externalities. Finally the government
(Walter Wessels, 34, Prentice Hall)This law applies tomay choose to regulate the market whereby the
normal goods and there are other goods that do notgovernment may discourage the existence of
obey this law and they include giffen and inferiormonopolies in the market.
goods. (Walter Wessels, 34, Prentice Hall)Public goods:
Inferior goods:In the market there are those goods that are referred
These goods do not follow the law of demand andto as public goods, these goods are provided by the
their demand declines even when the prices of a goodgovernment due to various reasons, the reasons why
remains constant, these are goods whose demandthe government provide these goods is because the
declines as the income of consumers increase in theprovision of these goods is too expensive for firms to
economy, as the income of consumers increase theyprovide. (Baumol and Blinder, 316, Blackwell press) Also
demand more expensive goods and therefore thedue to the fact that the provision of these goods by
demand of that good declines even if its price isfirms may not yield economic profits and the
reduced.government will source revenue from taxes in order to
(Walter Wessels, 34, Prentice Hall)provide public goods (Walter Wessels, 551, Prentice
Giffen goods:Hall)
These are goods whose demand increases as theirPublic goods include products such as roads, railway
prices increases, these are luxurious goods and asroads and education. The government will provide
their price increases consumers demand more, thethese gods given that they require huge investment
reason for this increase is due to the fact thatand the returns are relatively low. (Baumol and Blinder,
consumers feel that the high price depicts high quality316, Blackwell press)However problems arise whereby
and also status.the market may exhibit the free rider effect, this refers
(Walter Wessels, 34, Prentice Hall)to the situation whereby some individuals in the
Price Elasticity:economy do not pay taxes yet they enjoy public
Elasticity refers to the change in quantity demanded orgoods, therefore it is evident that the market cannot
supplied due to changes in the price of a good.function without public goods and therefore the role of
(Edward Nevin, 133, McGraw Hill press)the government in the market is to provide public
Supply price elasticitygoods.  (Baumol and Blinder, 316, Blackwell press)
Supply price elasticity refers to the change in quantityGovernment intervention:
supplied. (Edward Nevin, 133, McGraw Hill press)TheEconomists advocate for a free market economy, this
supply price elasticity is determined by dividing themeans that there should be no interventions by the
change in quantity supplied by the change price, agovernment because this only makes things worse,
value less than one means that the supply curve issome others state that the government should
inelastic while a value greater than one mean that theintervene in the operations of the economy. (Walter
supply curves is elastic. (Edward Nevin, 133, McGrawWessels, 551, Prentice Hall)There exist arguments for
Hill press)and against the role of government intervention in the
Demand price elasticityfree market economy, some economist's state that
Demand price elasticity refers to the change in quantitythe government has a role in the provision of public
demanded. (Edward Nevin, 133, McGraw Hill press)Thegoods, eliminating market failure and formulation of
demand price elasticity is determined by dividing thepolicies that ensure the smooth running of the
change in quantity demand by the change price, aeconomy.
value less than one means that the demand curve isOther economists such as Milton Friedman state that
inelastic while a value greater than one means that thegovernment intervention only makes situation worse,
demand curves is elastic. (Edward Nevin, 133, McGrawaccording to him government intervention example
Hill press)expansionary policy measures will take time to impact
Markets:the economy and therefore the time lag will prolong
There are four main types of markets that differ inproblems faced by the economy. (McConnell and Brue,
their characteristics, they include perfect competition,307, McGraw Hill press)The other reason he givens is
oligopoly, monopoly and monopolistic competition,that the decisions on government intervention may be
(McConnell and Brue, 128, McGraw Hill press) theinfluenced by the political environment and therefore
following is a discussion of these markets:policy measure may not be undertaken to improve
Perfect competition:current problems in the economy but may be aimed at
Perfect competitive markets are markets where weshaping the opinion of the masses. (McConnell and
have many buyers and sellers and the price in theBrue, 307, McGraw Hill press)
market is determined by demand and supply forces, inBibliography:
this case therefore the firms are price takes, (EdwardCampbell McConnell and Stanley Brue.
Nevin, 161, McGraw Hill press)Microeconomics: principles, problems, and policies. New
The following are the characteristics of a perfectYork: McGraw Hill press, 1999.
competitive market:Edward Nevin. An introduction to micro economics.
-         prices are determined by supply andNew York: McGraw Hill press, 2004.
demand, therefore firms do not have the power to set