Economics – Market structures Essay
The answer to Mr. Mark Fish is organizations are able to charge what they please because they are in a monopoly. Which exits as their market as there is no competition. I will illustrate market forces and how organizations respond by using graphical charts. The report will also illustrate how the business can achieve growth by raising internal capital or mergers and takeovers, I will also discuss how they achieve a competitive advantage by either selling the product/service for very cheap or create a differentiated product which is ‘better’ than their rivals.
The report concludes by discussing the relevance of the factors discussed. . 0 Introduction In this report we shall look at how market structures, market forces and business and cultural environment affect a business. This report has been created to provide understanding and knowledge of, how businesses perform and react in each market structure, how market forces and organizational responses are related and how a business and the cultural environments surrounding it, shape the behavior of an organization.
This report will begin by looking at ‘market structures’ 3. 0 Market Structures 3. 1 Introduction – Recently here at Midas we encountered a comment from a client ho was concerned with,
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Why do customers continue to support them? Fairly sure our business (Event management services to corporate business) wouldn’t get away with it!! ” – Mark Fish, Director ME Holdings Group Pl. This section of the report aims to answer this question, as well as, giving the reader a clearer understanding of market structures. It is traditional to divide industries into categories according to the degree of competition that sexists between the firms within the industry (Slogan, 2006).
Figure 1. 0 shows the four categories in to which industries are divided So what is perfect competition? Perfect competition is made up of four occupations, they are as follows: Organizations are price takers – This means that because there are so many firms in the industry that each one produces an insignificantly small oration of total industry and therefore has no power to effect the price of products. The price of products are dictated by the demand for that certain product.
Freedom of entry (No Barriers of entry) – Existing organizations within the industry are unable to stop new organizations setting up in business Organizations produce identical products – All products are ‘homogeneous’ or identical which would mean no branding or advertising Producers and consumers have perfect knowledge of the market. Producers are fully aware of prices, cost and market opportunities. Consumers are Lully aware of the price, quality and availability of the product At this point, you should take note that few, if any industries in the ere world meet these conditions.
The closest markets to perfect competition would be found in agriculture and the primary sector, fresh vegetables such as carrots and potatoes are a good example as each products are almost identical and prices are set in relation to the demand 3. 3 Monopoly Unlike perfect competition which I have Just described, where there are many organizations involved in an industry, at completely the other end we have a monopoly where only one organization exists in an industry. Although, whether an industry can be classified a monopoly is not always clear.
For example, a pharmaceutical company may have a monopoly of a certain drug, but there may be alternative drugs for treating a particular illness. Considering a monopoly exists only when one organization controls an industry there must be barriers to entry unlike perfect completion where there are none and new organizations can enter freely. In a monopoly barriers to entry must be high to block entry of new organizations. Barriers to entry are anything that prevents or impedes the entry of new firms into an industry and thereby limits the amount of competition faced by existing firms (Slogan, 2006).
There are various ways in which barriers can be created: Lower costs for an established firm – An established monopoly is likely to have have developed specialized production and marketing skills. It is more likely to be aware of the effluent techniques and the most reliable/cheapest suppliers and it can also have access to cheaper to cheaper finance. Legal protection – The firms monopoly position may be protected by patents on essential processes by copyright by various forms of licensing.
Some examples of organizations which are protected by legal protection are Microsoft Words operating system and Monsanto Which modified genetically put in a take over bid of any new entrant. The shear threat of takeover may discourage any new entrants Aggressive tactics – An established monopolist can probably sustain losses for longer than a new entrant. Therefore it can start a price war, mount massive advertising campaigns and introduce new brands to compete with the new entrant Domination – The monopolist may resort to various forms of harassment legal and illegal to drive a new entrant out of business
It also should be noted that, unlike perfect competition where organizations are price takers in a monopoly organizations are price makers. They can charge what ever they feel adequate to their product/service due to the lack of competition. Referring back to Mr. Fishers comment this would seem the answer to his quirky. If the organization he is consuming with are a monopolist, it would explain the reason that they get away with ‘extreme pricking policies with little or no innovation to customer service’ because there is no competition, they have zero competitors. Thus allowing them to hare as they wish. 3. Oligopoly A oligopoly exists when there are Just a few organizations between them share the majority of the market. Within a oligopoly, organizations behave differently. Organizations may produce virtually identical products such as, metals, sugar or petrol, however most oligopolies produce differentiated products such as, cars, washing up powder or soft drinks. Just like a monopoly structure, in oligopoly there are barriers to entry, the same tactics can be used to prevent new entrants into an industry. In contrast, unlike a monopoly, organizations have to consider one another cause there are so few, they are interdependent.
Each competitor is affected by another’s actions. This can lead two things competition our collusion: Collusion – The interdependence of firms may make them collude Onion) with one another. This in turn would almost make it like a monopoly, they Jointly maximize and share market profits. Competition – Despite the above, they may also be tempted to compete with one another to gain a bigger share of industry profits for themselves. Organizations you will find in an oligopoly include Warner Boor’s music group, Kellogg, Mills and Pearson Publishers, all of which have around four to five competitors. . 5 Monopolistic Competition Monopolistic competition or imperfect competition lies between perfect cooperation and monopoly. Organizations in this market sell products that are differentiated in some way from rival competitors. The differentiation may be slight, for example, on packaging or branding. In contrast the differentiation may be considerable. In monopolistic competition: The goods and services are NOT homogeneous There will be some form of barriers to entry Consumer and producers will NOT have perfect knowledge of the market
Organizations are able are able to point out areas of differentiation between rivals In a monopolistic competition organizations are able to charge prices which are higher than the marginal cost of producing a product. Resources are therefore not used in the most efficient way. 4. 0 Market Forces & Organizational Responses how they work. I would now like to illustrate how market forces and organizational responses are related. I will illustrate this by first, discussing what market forces means and secondly using graphical illustrations to help give you a better understanding.
Market forces is the term that relates to the interaction of demand and supply. As you know demand is quantity of a good or service that consumers will buy at a given price and supply is the quantity that manufacturers will provide for a price. A balance when then be created called an equilibrium when the quantity that producers will provide for a price meets the quantity that producers are willing to sell at the same price. Figure 2. 0 illustrates when the equilibrium is achieved As you also know the I-J is a market economy where consumers are free to spend their money on what they want.
This, in a sense, gives the consumer a good amount of power to effect if a business grows or declines. So given the fact that customers decide what they want and what they don’t, this creates what is known as elasticity in demand. Prices change regularly increasing and decreasing. Some prices rising will have little effect on quantities bought, although, when prices do change this could affect how consumers and suppliers react. A rise in price can see consumers buying less of that said product and in turn demand drops for that product. In contrast if price falls, demand shall rise. Figure 2. Elasticity of demand Figure 2. 1 shows you the change in demand when price rise and fall. Price of a product is measured on the vertical axis and the quantity of products produced is on the horizontal axis. As you can see UP and Q is where price is lower and thus demand for the products is greater but notice that when the price rises the demand for the product reduces (Pl & IQ). It is then crucial that you price your product/ service correctly because if not this may deter customers in to shopping elsewhere. Another market force which could also affect your business is consumer wages/ income decreasing.
If the national income falls, it means that consumers have less money to spend on goods and services. This occurs when the demand for a product rises, producers have to employ more staff to keep up with the rising demand and thus wages rise. In contrast if demand for products decrease wages shall fall Figure 2. 2 – Decrease in national wages shown by GAP Figure 2. 2 illustrates GAP which as you know is the average national wage in the UK as you can see at times of recession wages fall very low, whilst in periods of ‘boom’ wages rise because consumers are spending more and there is a greater demand for reduces.
It is critical that in each stage of the economy you are prepared to take the knock on effect of a recession or a ‘boom’. Obviously in a recession you will see a decline in demand for your product/service whilst in a ‘boom’ you may see a increase in demand. In recessions you may have to let staff go and close on certain days to keep expenditure low and in a boom period you may need to employ more staff and stay open longer to keep up with the rising demand. 5. 0 Business and Cultural Environment Now that I have talked over market structures and forces I would like to discuss what equines 5. Growth To get a good picture of what things might look like if you manage your business correctly and carefully I would like to discuss growth or ‘scale expansion’. Growth of your organization will involve moving from a small to a large organization, which would be financed through your internal profits, investment from shareholders or by borrowing from banks and external lenders. Generating profit is a very important way of financing growth. There is also another way which your organization could grow. This can be seen as a quicker more dynamic way of growth. You can merge or speaker another business.
A merge is a situation in which two or more organizations ‘cease to exist’ (Dave Needed, 2003). In other words two enterprises Join together, share the market and the profits. A takeover is like a merger but is where one organization buy the majority (more than half) of the shares within a company. What you MUST consider is what growth brings. You will need more resources such as staff and land. How will you acquire this? Will you support it through your internal profit or investment from shareholders or would it be in your best interest to merge or takeover a rival? 3 Competitive Advantage If and when your business has growth how and what is competitive advantage. According to business writer Michael Porter there are two ways be competitive. The first, a business gains competitive advantage from becoming the producer that produces at the lowest cost. This can be done wither by, producing goods in a very efficient way using the best technology or it can be done selling in large quantities. The second, a business can create differentiated products, which involves making the product better than that of rivals whilst at the same time making sore that he reduces is bought by the customer.
There is also a third concept which we can use, choosing a market to compete in. Some business products compete in a very large market. Whilst other business compete in a narrower range of products to more select group of customers. Take note that businesses that focus on low cost will have to have a large share of the market allowing them to produce more cheaply than others. Businesses which focus on creating a differentiated product, ensure that their goods and services meets he customers’ needs better than their rivals.
For you to evolve a competitive advantage you must combine your understanding of market forces and the marketing mix. Choosing the most competitive market should help stimulate demand. 5. 3 Factors which affect growth Now that you have an understanding of growth and how to gain competitive advantage, you need to consider what could affect your growth. 5. 31 Technology – We live in an age of dramatic technological developments (Dave Needed, 2003). Consider gaming for instance, young people today enjoy gaming and are willing to spend a loft money on games and consoles.
The more young people who take up gaming may not ant to ride their push bike or trial bike anymore/as much, as they are more concerned with the game they bought. Today, also, games console can access to the internet, which allows gamers to play with their friends online instead of playing together in the same room. This gives people the chance to communicate without being together. If gaming trajectory continues on the same path there could be a decline in demand for your product. 5. 32 Cultural Environment – Another element exists, for yourselves its Gaston.
Your organization must have a good understanding f the cultural characteristics of people in the societies in which they operate (Dave Needed, 2003). The majority of Godson’s population is elderly. What will you do to ensure you do not offend them? Considering they are the majority population, they could impact your growth hugely. If offended they could begin protesting about the trial/bike track which in turn could lead to the closure of your track. Consider also, the level of young and available who can work at the BMW/Trail bike track. There is only a small pocket of Gaston who are unemployed, where will you obtain your Barbour resources?
A lack of staff will lead to lack of good service, discrediting your BMW/Trail bike track Future customers could be discouraged by this review 6. 0 Conclusion To conclude this report, I would like to state that all of the subjects I have covered in this report are extremely relevant to you and your business model. The type of market structure you enter will determine the price you charge for your good/service and also who your competitors will be (if any). The market force will pull and push your organization, demand for your product will drop and rise in conjunction with the coal economy.
Your growth will develop as long as you manage your business correctly, always baring your cultural surroundings in mind and also the advancements in technology. The decisions which lay ahead will be tough and hard to make, ensuring you make the correct ones is the key. I hope this report has helped answer questions and gave you a solid understanding of how the market structure and forces will influence your organization. 7. Reworks Cited Dave Needed, R. D. (2003). Business for Higher Awards. Bath: The Bath Press. Slogan,J. (2006). Economics. Pearson Education Limited.