Market Structure Research Paper Example | Topics and Well Written Essays - 1500 words

Market Structure - Research Paper Example (Eaton, Diane and Douglas, 2002 pp.93) The firm is in equilibrium if it maximizes profit defined as the difference between revenues and costs (** = R-C). The equilibrium point is where the firm produces the output that maximizes the difference between TR & TC curves as shown below. In the short term the firm will either be making excess profits or losses depending on the position of an AC curves i.e. if the AVC curve lays below the price the firm is making excess profit as shown below. It is only possible for the firm to be equilibrium. The short run without necessarily breaking even point. However, in the long run the firm will either make neither losses nor excess profit i.e. the break even point will be the equilibrium point for the firm as shown below. The supply of such a firm may be derived by the points of intersection of MC curve with the successive demand curve. Assuming that the market prices increase gradually the demand curve will tend to shift upwards. Given the slope of the MC curve is positive each higher demand curve cuts the given MC curve on a point which lies to the right of the previous intersection. This implies that the quantity supplied by firm increases as the price increases. (Eaton, Diane and Douglas, 2002 pp.85) Changing from perfect competition to a monopoly that changes a single price will have associated implications to the firm. This is because as a monopoly market the market structure will consist of one single firm that will deal with products that have no close substitute, there will be no free entry of into the market and the firm will be a price maker meaning that the amount sold in the market will depend on the price Q = F (P) The monopolist will have a normal demand curve Q = a - b P with an option of making either of the following two decisions: (1) the price - in this case the quantity will be determined by the customer (2) the quantity- in this case the price will be determined by the future of demand and supply in the market The demand is equal to the average revenue (P = AR) for the monopolist since: Q = a - b P b p = a - q P = a - Q or a - 1____ ____ ____ Q b b b TR = P Q but P = a - 1____ ____ Q b b AR = TR = (a/b) Q - (1/b) Q2 = (a/b) - (1-b) Q thus P = AR ________________ Q They all have a common intercept (a/b) with the MR curve being twice as steep as the AR or the Demand