Economic Priniciple

1. Four market structures

In the mixed market economy, it can be divided into four types: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly.

1.1 Perfect competition

Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared (Dubey & Sondermann, 2009). Many firms existed in this market sell identical products to all the buyers. It is easy for companies to enter into this market, and the products are homogenous. The buys and sellers are well informed about prices. In addition, the sellers are price takers and need to face a perfectly elastic demand curve.

In a short-run market, in order to maximize the profit, firms need to decrease the cost including economies of scale or scope. The industry that best reflects perfect competition in real life is the agricultural industry. The products are similar and the price is in a same level.

As in figure 1, the market demand and supply shows the price and the quantity of demand. It turns out that when the selling price is the same to or exceeds average total cost, firms can gain an economic profit. Otherwise firms will incur an economic loss.

(Figure 1: Supply and demand of paper milling)

1.2 Monopolistic Competition

Monopolistic Competition is determined as a situation where the product can be differentiated to allow the providers that opportunity to charge premium pricing for their product, which has imperfect substitutes. Compared with perfect competition, there will be large and independent firms within this market. The products are differentiation and firms compete on the quality, price or branding. Like the companies in perfect competition, firms are easy to entry or exit in this market.

To gain more profit in Monopolistic Competition market, firms could pay more attention in advertising and promotion strategies. In addition, make the product differentiation and decrease the product and cost can be useful to catch the point.

For example, in Figure 2 it shows that each firm in this market meets a decline demand curve.

(Figure 2: Short-run price and output in monopolistic competition)

1.3 Monopoly

Monopoly is that a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. There only one firm sells a specific kind of product, that product does not have close substitutes. The power of the firm is strong and it makes the firm to be a price maker in this market. It is obviously that there are significant barriers to entry or exit.