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Business Ethics Essay

Essay by   •  April 22, 2019  •  Essay  •  736 Words (3 Pages)  •  664 Views

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Introduction

The market structures can be divided into a free, monopoly, oligopoly, and perfect competition. In every market structure firm’s resource allocation is determined by the market price of the product and firm’s cost of production. In the short-run, firm’s average revenue will need to be at least big enough to cover its average variable costs; however, the long-run will require covering all the firm’s costs(variable and fixed), including profit necessary to keep the firm in the industry. All have strict assumptions; each has different points of equilibrium and are affected by resource allocation.

Perfect Competition

Perfectly competitive market have lots of suppliers and buyers, but none is big enough to influence price or demand. There are no barriers to entry; suppliers can come and please as the businesses wish. All of the businesses have similar products. The industry sets the price, and single suppliers cannot influence it because a change in one's production does not affect the overall supply. As a result, the market price remains constant Firm’s demand forms a horizontal line which indicates the price, average and marginal revenue curves.

Free Market

A free market is an economic system where the market determines the demand and supply without government intervention. Hence, product prices are determined by the market demand and supply conditions of a particular good or service. A free market is the most efficient way of allocating societal resources which means that social welfare is maximized. It is essential to allocate resources because of scarcity - unlimited wants and limited resources. The concept of scarcity is solved through the pricing mechanism.

Monopoly

A monopoly is defined by its market power and its’ possession over its particular market. It gives the business the authority to control the prices and supplies for its goods and services as it pleases. Monopolies can have detrimental effects on consumer and social welfare as they restrict consumer choices.

In a monopoly, there is the presence of a single firm in a particular industry. The price demand for a monopoly will be less or more inelastic as consumers do not have another choice, but to pay the high price or go without for that particular good which would have been more elastic in a perfectly competitive market.

To understand a monopoly’s effect on the market, it needs to be compared to a perfectly competitive market. In a perfectly competitive market, a single company cannot decide on the price of its’ product and has to price according to its’ competitors. Whereas, in a monopoly market, businesses can set the prices, typically higher selling prices. The monopolist's ability to its’ prices enables the company to abuse its’ power by raising the costs

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