Market Structure Characteristics

Characteristics of Market Structure

• Market Structures: Different types of market forms based on the number of sellers, product differentiation, barriers to entry, pricing power, and non-price competition.

1. Perfect Competition

• Number of Sellers: Many

• Product Differentiation: Homogeneous/Standardized products

• Barriers to Entry: Very Low

• Pricing Power: None

• Non-Price Competition: None

  In a perfectly competitive market, numerous sellers offer identical products, and no single seller can influence market prices.

2. Monopolistic Competition

• Number of Sellers: Many

• Product Differentiation: Differentiated products

• Barriers to Entry: Low

• Pricing Power: Some

• Non-Price Competition: Advertising and Product Differentiation

  This market features many sellers competing with slightly different products, allowing some control over pricing due to product differentiation.

3. Oligopoly

• Number of Sellers: Few

• Product Differentiation: Homogeneous/Standardized

• Barriers to Entry: High

• Pricing Power: Some or considerable

• Non-Price Competition: Advertising, product differentiation

  An oligopolistic market consists of a small number of firms, leading to significant price control, and firms may use advertising to differentiate their products further.

4. Monopoly

• Number of Sellers: One

• Product Differentiation: Unique Product

• Barriers to Entry: Very High

• Pricing Power: Considerable

• Non-Price Competition: Advertising

  In a monopoly, a single firm dominates the market, offering a unique product with high barriers to entry, allowing for considerable pricing power.

• Desirable Market Structure: From the perspective of firm owners, a monopoly is often considered the most desirable market structure due to the potential for maximized profits stemming from their significant market power and control over pricing.

Business Cycle Phases

• Phases of the Economy

  • Expansion

  • Economy is experiencing an upswing.

  • Activity levels are above potential output.

  • Positive output gap starts to narrow.

  • Consumers are entering the market and spending.

  • Businesses are more confident, leading to increased hiring but at a slower pace.

  • Peak

  • Economy reaches its maximum output level.

  • Activity levels surpass the average growth rates.

  • Businesses start showing signs of deceleration in growth.

  • Inflation may begin to pick up modestly due to increased demand.

  • Slowdown (Contraction)

  • Economy weakens; potential to enter a recession.

  • Negative output gap opens, indicating that the economy is underperforming.

  • Activity measures show below-average growth rates, indicating declining consumer confidence and spending.

  • Businesses begin to cut hours, eliminate overtime, and freeze hiring leading to layoffs.

  • Unemployment rate starts to rise.

  • Trough

  • The lowest point of the economic cycle where the economy transitions from contraction to recovery.

  • Negative output gap is at its widest, showing the lowest employment and spending levels.

  • Unemployment remains higher than average.

  • Recovery

  • Economy begins to grow again, moving towards expansion.

  • Unemployment rate stabilizes and starts to fall gradually.

  • Inflation remains moderate, with growth picking up modestly.

  • Businesses rely on overtime before making new hires.

Employment Trends

• During Expansion

  • Businesses continue hiring at an increasing rate, leading to lower unemployment.

• During Slowdown

  • Businesses cut down on hiring, leading to layoffs and a rise in the unemployment rate.

  • Initial response to slowdowns includes cutting hours and reducing overtime.

• During Recovery

  • Employment begins to rise as businesses gain confidence.

  • Unemployment rates continue to fall, but initially at decreasing rates.

Inflation Trends

• During Expansion

  • Inflation remains moderate as demand begins to outpace supply.

• During Peak

  • Inflation starts to pick up due to excess demand.

• During Trough

  • Inflation tends to decelerate but may lag due to slow economic activity.

• During Recovery

  • Inflation could rise again as the economy regains its footing and demand increases.

Leads and Lags in Business and Consumer Decision Making

• Leads: Actions taken by businesses ahead of economic changes to maximize opportunities (e.g., expanding production during expected growth).

• Lags: Responses by businesses and consumers that occur after economic shifts have begun (e.g., delaying hiring until after clear indicators of growth).