Monday, April 9, 2012

Essay on Markets

Essay on Markets

1. Perfectly competitive market is obviously the hypothetical market condition, when producers and consumers are not able to influence the market price. So, companies are able to sell everything they want, but they cannot increase or decrease price levels. The analysis of the perfectly competitive market laid the foundation for the theory of demand and supply. Such market is in equilibrium, where all resources are used and allocated efficiently. When the new firm enters the market, the prices go down, but in the long run, the companies receive usual normal profit. Firms that operate at the perfectly competitive market are said to be price takers, or in another words, it is the market that chooses the price and the firms just have to accept it. In such market all products are identical and all supplier and consumers have the total complete information about the set prices. The resources are perfectly mobile and available in the perfectly competitive market, as well as production technologies. Market participants, I mean seller, are not able to receive the abnormal profit in the long run. The only situation when it is possible to receive the abnormal profit is in the short run. Allocative and productive efficiencies characterize the perfectly competitive market. Allocative efficiency refers to the situation when the price equals the marginal cost, and in this situation the consumer is able to purchase the product at the lowest possible price. Productive efficiency refers to the situation when the company produces its products at the lowest point of the average cost curve, meaning that the firm cannot decrease the price any more.

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2. It is important to understand the managerial decisions in the long run and in the short run, and how they are shaped by different market structures.

As I have already mentioned, it is impossible for the firm, which operates at the perfectly competitive market, to get the abnormal profit in the long run, meaning that the company earns as much as it is needed to cover its economic costs. When the company earns profit in the short run, it enables other companies to enter the market. Speaking about managerial decision when the company is making the loss, the thing that should be decided is whether to continue the operation or not. The decision will be connected and dependant on two issues- total costs levels and whether the company is operating in the long or short run. So, if the company is operating in the short run and it is making a loss, this means that costs exceeds revenue and total revenue equals total variable cost, the managers should decide to continue production. If the conditions regarding total costs and revenues are not met, then managers better make the decision to shutdown and just to pay fixed costs. Fixed costs are to be paid in any case, so it is better to continue production and try to decrease total costs and increase profits. Managers can do that by introducing of the computerization and automation to the production process, which would cut costs, as well as try to use new methods of production. In the long run situation when the managers should make the decision to continue production is the following: the price must be higher then ATC. There is no difference whether to shutdown or continue production when the price equals ATC. This case differs from that of with short run, as there are no fixed costs involved and everything is variable.

An oligopoly refers to the market structure where the small quantity of sellers takes more than 40% of the market. Managerial decisions of firms are very much influenced by the decisions of the other firms. In the oligopoly, companies have to produce and sell their goods in the situation of imperfect competition, the entry barriers are very high and it is difficult to enter such market. When the manger makes the decision to increase the price, the other firms at the market do the same and vice versa. Though managers in oligopoly do not risk increasing prices, as even a small upward price shift will lead to the substantial customer loss. The same situation occurs when the managers make the decision to decrease the price, as the company will be able to gain several more customers, but competing companies will begin the price war.

The only right managerial decision in the oligopoly would be the use of the non-price competition to get more profits and to gain larger market share.

Oligopoly market is also generally characterized by the economies of scale. The economies of scale presume that when the level of production increases, the cost per unit of the good decreases. So, according to this assumption more advantage has the large producer in the oligopoly market.

In general, there is no optimal theoretical framework that would provide the answers how the managers should behave and what pricing and output decision would fit the bet for this market structure. The analysis should be made for the special set of the circumstances.

Monopoly can be defined from two perspectives- from economical and political. In the economics monopoly is the market situation when the enterprise or an individual exercises sufficient control over the market. There is no economic competition in monopoly and lack of substitute products. Monopolistic companies and their managers seem to be lucky, as there is an impression that they are able to set the prices that they want and earn as much as they can, because customers will just have no choice, and they will be paying the set price. But on practice, monopolistic companies (which are very rare) are strictly followed and regulated by correspondent government authorities (for example, antimonopoly committees).

In the political understanding, monopoly is generally referred to the firms with the larger market share and the lack of the fair competition at the market.

There can be also government-granted or legal monopoly that is sanctioned by the state, which is usually used to enrich the domestic constituency.

The company at the monopolistic market experiences no price pressures from the other companies, as there no such companies, but managers still should be very careful, as they may face the pricing pressure from the potential competitor. When the managers take the decision to make the price too high, that can be the sign for the other companies to enter the market if they are able to propose the same product, but at lower price level.

In monopoly, the company faces the entire market demand curve. On practice, companies do not choose to produce more goods to maximize their revenues, they just set higher price. In monopoly the price elasticity of demand for customer is below one (in absolute value), and therefore it is very tempting to the firm to rise the price, and in the long run it gets more money for less amount of goods. When the price rises, the price elasticity also increases, and the best variant above it will be more than one.

The greatest problem of the monopolistic market is that the form that operates on it becomes less efficient and innovative, because it just not needed to attract the customers and take more of market share.

So, the best managerial decision in monopolistic market will be setting the right price and keep up with changes for the mutual benefit of the customers and the firm.
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