MARKET MODEL PATTERNS OF CHANGE

Market Model Patterns of Change



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Abstract

In this paper, we try to focus on the Monopoly market model. The paper describes the industry and explains the general pattern of change of the particular market model. It also highlights the Hypothesize the basic short-run and long-run behaviors of the model in the industry in a “market economy.” It also analyzes the possible areas for the industry that could lead to transaction costs, and explain each in detail. It also speculates about the behavior that could result from these transactions and propose at least strategies for dealing with them. It also explains how you would modify the data in order to make it relevant to decisions a manager must make. The paper also explains the major factors that affect the degree of competitiveness in your industry.

Market Model Patterns of Change

Introduction

A monopoly is the only producer of a good for which there are no close substitutes. This puts the monopolist in a unique position: It can raise its price without losing consumers to competitors charging a lower price. Thus, the monopolist is the industry and faces the downward-sloping market demand curve for its product. The monopolist can choose any point along that demand curve; it can set a high price and sell a relatively small quantity of output, or it can lower price and sell more output (Dixit, 2009).

Short Run and in the Long Run

Figure shows short-run equilibrium for a monopolistically competitive firm.

The profit-maximizing firm will produce qLR, where marginal revenue equals marginal cost. In this case, the corresponding price, PSR, is above average cost so the firm earns a positive economic profit in the short run. As in perfect competition, positive economic profits cannot persist in the long run. The profits will encourage other firms to spend the funds necessary to develop, produce, and advertise new products. Over time, this entry will shift each existing firm's demand curve to the left until economic profits reach zero. Figure shows the long-run equilibrium: The firm produces qLR, where marginal revenue equals marginal cost and where price equals average cost. Because entry and exit are easy, no firm can make economic profits in the long run even though each firm has some market power.

Possible Areas for the Industry

The possible areas for the industry as all firms, ranging from perfectly competitive firms to monopolies, maximize profits by producing the quantity of output for which marginal revenue equals marginal cost. Recall the definition of marginal revenue: the additional revenue a firm receives from selling one additional unit of output. Because a monopoly faces the market demand curve, the only way it can sell an additional unit of output is by lowering the price it charges on all units. Consequently, marginal revenue for a monopoly has two components: an output effect and a price effect. The monopoly gains revenue from the additional unit of output sold but loses revenue on all of the units previously sold at a higher ...