Market Types And Equilibriums In Economics

Types of Markets

Under the concept of economics market can be defined as the medium through which purchasers and the sellers that comprises of the transaction of goods and service. The meaning of the market is not only restricted to dealing physically in goods and service however it goes further than that. Categorization of the market is performed on the basis of the attributes namely the locations, forms of goods sold, total number of participants in the market and the extent to which the market possessed by them (Taussig, 2013). The most common form of classifying the number of market is based on the purchasers and the seller together with market power.

Depending upon the existence of purchasers and sellers there are four common types of market namely the perfectly competitive market, monopolistic market, monopoly market and oligopoly market. Market such as monopolistically competitive market possesses double aspects of the market namely the monopoly and perfect competition. However, market with perfect competition and monopolistically competitive market possess few similarities and differences. The features of these two types of market is stated below;

Existence of several buyers and sellers represents the characteristics of both the perfectly competitive and monopolistically competitive market. There are several sellers that are competing with each other under the perfectly competitive market. Under the market that is monopolistically competitive along with the diverse brands that are competing in the market. In this market there prevails an intense competition among the sellers which reduces the market power (Bernanke et al., 2015). Nevertheless, under the market that is monopolistically competitive the sellers make use the market power.  

Under the competitive market there are sellers that sells homogeneous market however under the monopolistic market there is a different situation. The sellers under this market share different products. The products can be differentiated in terms of packaging, brand name and other criteria.

Under the Perfectly Competitive Market the existence of several buyers and seller eliminates the entire market power. Neither the purchasers nor the sellers possess have any influence on price (Frank, 2014). The demand and supply forces ascertains the market power. Conversely, the sellers of imperfectly competitive market possess the forces that have possess certain degree of market power. Under the monopolistic market the seller has the power of controlling the price.

Under the perfectly competitive and monopolistic market companies can enter or exit the market freely. The supernormal profit or economic loss taking place in the long run is eliminated from the free entry and exit of the market resulting the organizations with economic profit in the long run.

Sellers under the perfectly competitive market faces an elastic demand curve where the demand curve is in the horizontal straight line. The demand curve represents the average income curve for the seller. Since price remain constant under competitive market, the average return and the marginal return is identical with price (Laibson & List, 2015). For the maximization of profit, the marginal revenue and cost must be identical. Since marginal income under the competitive market is similar to price the conditions of profit maximization results in;

1. Price = Marginal Cost

Distinguishing Characteristics

The second conditions which needs to be met is the MC cutting the MR from below representing the slope of MC higher than that of the MR.

Under the short run, perfectly competitive organizations could possess super normal profit or loss or merely the normal profit. This is reliant on the market price and position of the average cost curve. Under this situation, price is higher than the average cost where the total income going past the total cost which offers the firm with the beyond normal profit. where price is lower than the average cost then the total income is not sufficient for the firm to cover the total cost resulting the organization to suffer loss (Cowen & Tabarrok, 2015). Normal profit is derived when the price is sufficient to cover the total cost.  

For a monopolistic competitive organizations, the situation of demand is different from the firms competing under the competing market. The sellers usually possess control over the price and the demand curve slopes towards down. The profit maximization is done through usual conditions of equalling the marginal revenue and cost. Under short run, organizations can incur supernormal profit or loss and the same is illustrated.

Under the perfectly competitive industry any kind of short run profit or losses is adjusted in the long run with only normal profit leftover under the competitive industry (Case et al., 2014). The below stated graphical presentation provides the mechanism of profit in the short run for organizations competing in the market to only the normal profit under the long run. 

For instance, when the short run price of the organization is beyond the average cost then the firm experiences supernormal profit. On being engrossed by high profit new firms enter the industry and increasing the industry supply from Q to Q* with higher supply bringing down the price from P to P*. The process continues till every firm in the industry derives normal profit and the such adjustment mechanism is opposite during loss. At the time of loss, the prevailing firms leaves the industry resulting in reduced supply and resulting the price to increase till the normal profit is attained.

Similar to perfectly competitive market, under the monopolistic industry free entry during profit and exist during loss results in normal profit since different conditions of demand with long run output is not similar in this industries. Firms that are Monopolistically competitive does not function at lowest point of average cost (Maurice & Thomas, 2015). Instead it functions at the stage of tangency amid the demand curve and the average cost. Organizations administer profit on the leftward side of the minimum average cost holding certain excess volume.

Product efficiency is attained when goods manufactured with optimum input which increases the output in one industry resulting in reduction of output of other products. Any stage on the curve of production possibility represents the combination of efficient input. To be productive efficient firms should function with the minimum average cost.

Allocative efficiency reflects the choice indicates the choice of socially favoured productions points. The allocative efficiency represents the socially optimal manufacturing and distribution stage.

Short-Run Equilibrium

During the long run organizations under the perfectly competitive environment generates the minimum average cost. This assists in attaining the productive efficiency. The informally preferred point of manufacturing represents the one where the marginal benefit is equivalent to the marginal cost (Miller & Benjamin, 2015). The marginal benefit of the customers is stated in the price and under the competitive market, the prices is set equivalent to the marginal cost and allocative efficiency is attained. Consequently, under the monopolistic competitive firm neither the product efficiency is attained nor the allocative efficiency. Long run price is stated beyond the minimum stage of average cost with price higher than the marginal cost.

The oligopoly market has derived its name from the Greek word “oligi” which means few and “polein” symbolizes selling of goods. Under this market there are few sellers of product selling identical or distinguished goods to the huge number of purchasers. The features of the market is stated below;

Existence of the large seller with large amount of market share output forms the feature of this market. There is a strong competition prevailing among the seller to influence price and volume of production (Ruttan & Thirtle, 2014). As there is a small number of firms in the market every firm is impacted by the strategy of the rivals.

Firms under this market is inter-reliant which signifies that the actions of one firm affects the decision of its competing firms. Prior to implementation of any strategy organizations consider the actions of the rival firms. Changes in the price of one firm results in change in the decision of the companies in the marketplace.

Under the oligopoly market there prevails the barriers in the entry and exit of the new organization resulting in the limited firms in the industry. Some entry barrier includes the patents, capital needs, patents and exclusive control on raw materials. Organizations are able to overcome the barriers by entering in the market. Hence, barriers to entry limits the firm in experiencing supernormal profit during the long run. 

Under the oligopoly market companies possess market power and uses the power to create an effect on the price. Because of the price war companies largely escape competitions in respect of the price and instead follow the rigidity pricing strategy (Canto et al., 2014). Organizations compete in respect of the advertising, improving service quality, brand promotion and some other kinds of non-pricing rivalry.

With the prevalence of intense rivalry and strategic reliance amid the firms there is need to adopt numerous sales promotions strategies. The cost of advertisement plays an important role in crucial in the market because the companies are mostly going to indulge in the non-pricing rivalry with advertisement cost turning more important than the oligopoly market.

Kinked demand curve is regarded as important feature of the oligopoly market. The equilibrium under the market is determined from the normal conditions of the profit maximization where Marginal Revenue is equal to the Marginal Cost (Friedman, 2017). When an organization increases the price beyond the equilibrium price others would not follow the identical strategy since a lower price would help them in capturing the higher market share. Under this part the demand curve is considered to be flexible in nature. Consequently, the rival firms lower down the price then others would follow the identical path to escape loss in market. As evident the market demand is inelastic in nature with all the firms acting in the identical manner. This lead to a kinked demand curve representing the change in the demand from being elastic to inelastic at the lower prices. 

Long-Run Equilibrium

As defined in the oligopoly market they have some unique form of features. As evident different market in a country possess structure similar to the oligopoly market. Apart from the perfectly competitive market, the oligopoly market is not theoretical instead in the real market it is prevalent (Schwager & Etzkorn, 2017). However, in the developed and the emerging economies there are some market that is dominated by some sellers resulting in concentrated market. Australia is regarded as the developed nation in the world with concentrated market in few of the major economic areas. One of the sector in the Australian economy is the banking sector.

The financial sector act as the major contributor in the economy as it lay down robust financial economic growth in nation. In such a manner, banking is regarded as the major sector of economy. A state such as Australia is reliant on the financial sector for its growth and the banking segment of Australian has grown over the years. The sector is one of the fastest growing industry in the country. Over the years there are several major players in this segment that is concentrated in the industry such as oligopoly. The Australian banking industry is presently dominated by large banks such as the Commonwealth Bank, National Bank of Australia, Westpac Banking Corporation and ANZ Banking group.

The above stated banks have occupied greater proportion of market share in the economy and the financial service of this banks is not restricted to the domestic industry but it also extended further than that (Keynes, 2016). Around 80% of the market share is occupied by these banks and a graphical representation provides the evidence; 

These banks not only dominate the Australian banking segment in respect of the loans and advances but also in respect of the deposits received, securities outstanding and other forms of financial transactions (Ehrenberg & Smith, 2016). The supremacy of the above stated banks serve as the major threat for its competitors and prohibits the entry of the new firms. 

The above stated graph represents that banking sector in most the developed and developing nations. There are large number of concentration that is prevalent in Netherland, Australia, Sweden and Canada with more than 80 percent. As evident the government and politicians generally conflicts with the market concentration however for Australia, concentrated oligopoly market structure in the banking industry is assisted by the politicians (Rios et al., 2013). This allows the government of Australia to make an attempt of promoting innovation in the industries.

Market concentrations possess a combination of impact on the whole economy. The lower level of rivalry with higher market power in the hands of big players are able to charge greater price. under the oligopoly banking industry banks that are dominating charge greater rate interest. This leads to strong financial sector in the realized global financial crisis. Australia continued to be a comparatively in the good position in respect of the current international crisis.    

Australian economy is one of the prominent economies in the world since it has been through several stages of expansion reflecting growth in varied economics aspects. The increasing population has exerted pressure on the housing market in Australia and to meet the increasing demands of houses supply of houses should be increased (Hildenbrand, 2014). But numerous problems from the supply side has contributed in the housing affordability crisis.

Productive and Allocative Efficiency

The housing affordability crisis in Australia undergoes numerous changes from the demand and supply conditions impacting the price of houses and affordability. Numerous factors from the demand side has increased the pressure with evidences has represented the large sum of spending on the housing accommodation (Paciorek, 2013). There is a severe crisis of housing affordability among the lower and middle earning groups with the price of house in several capital cities of Australia increase risen by 100%. As evident in sydney the prices of houses have increased by 105% and this took a negative turn when the same is combined with low rise in wages. With lower rate of interest rate individuals are encouraged to discover the affordability by borrowing for housing finance leading to increased housing liability.

Demand side factors impacting housing affordability in Australia:

Australia has higher population growth with the average amount of housing size has declined over the years. Numerous factors have contributed to the small household size such as marriage, divorce and separation (Justiniano et al., 2015). A fall in demand for housing arises among the people. Apart from the demand of houses from domestic inhabitants, a growing demand for migrants is also noticed. Consequently, this results in rising pressure on the housing demand from the domestic and migrants as well.

Over the decades the economy of Australia has expanded many folds and increased the average household income. When there is a rise in income, the spending rises as well and individuals can spend more on housing (Caldera & Johansson, 2013). The demands for holiday homes also rises in the coastal areas hence the rising demand with restricted supply increases the housing prices.

To promote demand for housing there is a decreased in the housing loan and the accessibility of loans increases the demand for houses.   

Increasing housing prices fascinates investors to make investment in property. With the anticipation that the price would increase in future results in speculative demand for the houses with speedy increase in the residential outlay.

Numerous policies have been considered to make housing affordability among the populations and individuals expressing their desire of purchasing house are provided with funds in the budget. Below listed are policies of housing affordability:

Special grant to first house purchase: First house purchasers are provided the policy of first house purchase at an affordable price. This grant varies from state and territories. In several places the grant is provided on new homes (Jones et al., 2016).

Rising supply of land: To meet the demand, supply of houses must be increased since the supply has been limited due to less availability of land. To reduce the barriers of supply side Australian government has enabled commonwealth land to create new houses.

Overseas purchasers: Domestic supply of houses generally faces shortage because of the increased demand from the international purchasers (Anenberg, 2016). Emphasis is placed on meeting the demand for domestic purchasers and preventive measures have been considered for international purchasers.

The supply of land must be increased to meet the demand. The availability of suitable land is primary step forward in meeting the housing supply with effective use of land to augment the cost of housing (Cuerpo et al., 2014).

In spite of the availability of land the government complex structure has prevented the construction of houses. Hence, these barriers must be removed to assure steady supply with especial emphasis on housing development industry must be placed. 

The solution of effective supply side must not only consider building new houses but should place emphasis on the reasonable as well (Joshi et al., 2013). Subsidy should be provided to constructors to meet the construction cost of offering houses at lower cost.  

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