Market Structure and the Role of Government
1) Explain the unique characteristics of the four primary market structures.
The four main market structures include perfect competition, monopoly, monopolistic competition and oligopoly. Perfect competition market structure is characterized by large number of sellers and buyers, homogenous products, entry into and out of the market is easy and consumers have full market information (Dewar, 2011). Due to these characteristics, the price of products under perfect competition is determined by the market forces hence individual producers have no control on the prices of products. Under monopoly market structure there is only a single firm that supplies a product in the market where there is no substitute products. The market has high barrier of entry due to a number of factors such as huge capital and exclusive ownership right. In monopolistic competition market, there are many sellers in the market but less than the sellers under perfect competition are. The products are also differentiated under monopolistic competition market structure and the market has relatively low entry and exit barrier of firms in the industry. In oligopoly, there are few sellers of products in the market and strategic interdependence where firms can make their independent decisions.
2) Explain why economic profits are zero in the long run in a monopolistically competitive market.
New firms will be attracted to enter the monopolistic competitive market due to the positive economic profits and low barrier of entry. In the long run, the market will be saturated as a result of entry of new firms. The entry of new firms in the monopolistically competitive market structure will lead to an increase in supply of differentiated products (Boyes & Melvin, 2008). This will cause a shift in demand curve to the left. As the new firms continue to enter the market, the demand curve will continue shifting to the left until it reaches a point where it is tangent to the average total cost. At this point the firm will not be making normal profits hence new firms will not be attracted to enter the market. This is because the profits of firms in the industry will be zero, which is also referred to as economic profit.
3) What are the characteristics of a public good?
Public goods are the goods that can be jointly consumed by all individuals. Public goods have two major characteristics that include no rivalry and no excludability. Public goods have the characteristics of non-rivalry due to the fact that consumption of the public good or service by an individual will not prevent the consumption of a similar good or service by other individuals. Another characteristic of public goods is that they are non-excludable in the sense that it is not possible to provide the good or service to one individual without other individuals also consuming it (Dewar, 2011). This implies that it is not possible to exclude other individuals from consuming a public good. The consumers are also able to obtain the benefits of consuming public goods without necessarily paying for them. The non-excludable characteristics of public goods can lead to the free rider problem where individuals are unwilling to pay for the good if other individuals are not paying for it.
4) Discuss the two ways that product differentiation affects the demand for a product.
Product differentiation can affect the demand for a product in two main ways; persuading and informing consumers. In terms of informing consumers, product differentiation such as advertising and branding can lead to improved information about a product by the consumers. Through product differentiation, consumers are made aware of the prices of the products as well as their availability. Advertisement that focuses on the quality and features of a product provides relatively cheap source of information regarding a particular product to consumers (Folland et al, 2007). This leads to low prices and high quality products. Differentiation can also affect demand through persuasion. Differentiation can help persuade consumers to purchase products. This can be achieved through advertisement that focuses on the benefits of particular products hence enticing consumers to purchase the products. It can also involve providing information regarding the perceived difference of the products with other competing products. Hence, the consumer will be persuaded to purchase the products as a result of product differentiation in the market.
5) Describe at least five different forms of government intervention in the economy.
The government can use various measures to help promote equity and efficiency in the market. Some of the ways that can be used by the government as intervention measures in the economy includes provision of public goods, correcting externalities, levying taxes, implementing antitrust law, operating public enterprises and sponsoring redistribution programs (Dewar, 2011). The provision of public goods involves the provision of essential services to the public such as health intuitions and schools. In correcting the externalities, the government can introduce policies that can ensure the wellbeing of the citizenry and the environment such as imposing heavy tax to firms that pollute the environment. Levying of taxation by government can either discourage or encourage business activity in a country. The implementation of antitrust laws involves the introduction of policies that are intended to promote perfect competition in a market and discourage monopolies. The government can also operate public enterprises such as hospitals and schools hence avoid the exploitation of the public by the private sector. Redistribution programs entail transferring wealth from a given group in society, presumed to be more well of, to another group, which is presumably less fortunate. This aims at ensuring there is a balance in the social structure. One of the methods of implementing redistribution is by introducing higher taxes to those members of society considered to be more well of and lower taxes for the less fortunate or privileged.
References
Boyes, William & Melvin, Michael, (2008). Economics. 7th ed., Boston: Houghton-Mifflin Company
Dewar, D. M. (2011). Essentials of health economics, Jones and Bartlett Publishers
Folland, S, Goodman, AC, and M. Stano. (2007). The Economics of Health and Health Care, 5th ed.Upper Saddle River, NJ: Pearson/Prentice Hall.
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]