In the economy there are four major market structures that will be discussed in this paper; perfect competition, monopoly, monopolistic competition and oligopoly. All these markets influence the pricing system of goods and services. Perfect competition Perfect competition involves the buying and selling of one common good or service by very many firms. Producers concentrate on common goods and services that are needed by the consumers in a daily basis. An example of such goods can be agricultural products that are mainly raw materials like milk, vegetables and many more.
Industries such as PayPal, Skype and Kijiji are auction companies that have the perfect competitive structure. This is so because it is easy to enter in to the internet auctioning service sector. The pricing system of this particular structure is not well defined as no producer can influence the prices of goods and services. Here, the producers are simply price takers. They produce where the price will be equal to marginal cost. Producers and sellers major aim is to maximize their profits thus produce where marginal revenue cuts the marginal cost.
The marginal revenue is always equal to the price. This makes the demand curve to be horizontal. It is has no
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The limitations of this structure can be seen in the long run when the firms do not make any profits. Critics have further gone to say that it does not consider other ways of making a product marketable for example, advertising, reduction of prices and innovation (Robert, 2004). In the short run, where there is very low entry of sellers or producers, a single firm has the potential of making positive profits. As shown in graph A, a firm will produce at the lowest point of the average cost curve (C) therefore the price (P) will be greater than the cost (C) thus positive profits.
(Graph A-short run perfect competition) (Graph B-showing long run perfect competition) In the long run (graph B) there is entry in the market and competition becomes very stiff. The demand curve of the producer shifts downwards thus causing prices, marginal and average revenue to reduce. The seller is selling where the average cost curve is at the lowest thus the profits are equal to the marginal cost thus normal profits (Robert, 2004).