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Monopoly Case Study: Civil Aviation Authority of Nepal
HP
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Market Structures
In economics, the concept of market refers to a structure be it formal or informal where in buyers and sellers come together to interact and exchange goods and services in return for a price expressed in monetary terms. Markets form an important part of the economic business structure of any country as markets decide the volume of trade and money exchange that will take place in the country and thereby decide the pace and growth of the economy via the monetary transactions. Markets in economy are of various kinds depending on the transactions taking place there in. For example- Money Market, Goods and Service Market, Foreign Exchange Market, Labor Market, Stock Market and so on and so forth. For the ease of the market analysis and evaluation, economists have distinguished the market on the basis of bargaining power enjoyed by the buyers and sellers in the market They have inherently identified four forms of market structure namely, perfect competition, monopoly, monopolistic competition and oligopoly. The distinction in the various market forms have been made on the basis of number of buyers, number of sellers, type of products, the play of bargaining power and the profit margins and buyer satisfaction. Each of the market forms have been discussed in details in the assignment as follows:
Perfect Competition:
Perfect competition is the first and the most basic form of the market structure. The market structure under perfect competition is characterized by the presence of large number of buyers and sellers. All the buyers and sellers in the market are dealing in homogeneous products i.e. exactly same product with same quality and price. The price in the perfect competition structure is decided by the free play of demand and supply and no single buyer or single seller is strong enough to influence the market. All the buyers and the firms in the market are addressed as price taker. The perfectly competitive market deals in homogeneous products and hence no single seller has the specialization in the production and no buyer in the market has special demands or categories to look into. There exist free entry and exit in the market. In the short run when outside firms see that the firms in the perfect competition earning super normal profits; taking the advantage of lack of specialization and free entry, new firms enter the market till the super normal profits are normalized and reduced to normal profits in the long run. The other aspect is also enjoyed by the firms. When the firms realize that they are incurring losses in the short run, they tend to exit the market till the point where all firms are enjoying normal profits. Hence, it can be stated that the firms in the perfectly competitive market structure earn normal profits in the long run. Perfect competition market condition is the ideal market condition and is often recognized for productive and distributive efficiency because in the long run all the buyers and suppliers are in the state of equilibrium with no disturbances existing in the economy.
The firms in the perfectly competitive industry work on the principle of profit maximization i.e the principle of marginality. They try and equate their marginal cost with marginal revenues. But, since the firm face horizontal demand curve from the industry implying that the marginal revenue curve, average revenue curve and the demand curve are all same. The firm equates its marginal cost with the industry pricing so as to decide the optimal level of production that the firms needs to produce.
The long run market condition of the perfectly competitive market is given below:
Monopoly
Monopoly is considered as the most exploitative form of the market which is characterized by the presence of single seller. The market enjoys the presence of a single seller often regarded as the “king” of the market who rules the market by supplying a unique product. The market has many buyers and all the buyers are dependent on the only supplier in the market for their needs. The supplier runs and owns the entire industry and often resort to exploitation of various degrees. The monopolist is the whole and sole of the market and decides as to what amount of quantity will be supplied and at what price. The monopolist faces a downward sloping demand curve from the market; which is the price curve or the average revenue curve for the monopolist. The monopolist decides to produce the quantity where its marginal revenue is equal to its marginal cost. The monopolist charges the price at this quantity from the demand curve. With this practice the monopolist enjoy super normal profits in the market. The monopoly markets are often regulated by the government agencies and authorities to check on the over exploitation of the consumers. Also, at times even government may take up the supplies of the most crucial goods and services in the economy so as to make sure that the consumers in the market are not...