Report
Economic 1: Micro and Macro Theory and Application
Name Huang
December 15th 2011
The market structure is usually divided into Perfect Competition and Imperfect Competition. Monopolistic, Oligopoly and Duopoly are three types of Imperfect Competition. The mobile phone market is believed to be an oligopoly. Oligopoly is a situation where there are only a few sellers of a particular commodity. There are several characteristics of oligopoly. It has high degree of industrial concentrations, the goods or services may be very similar. Just like the mobile phone market, few large companies control this industry, such as Vodafone, BT Cellnet, One2One and so on. They offer similar mobile phone services and they have almost equal market shares which makes other companies hard to entry this industry.
In oligopolistic market structure, a business may appear to face a kink in the demand curve for its product. This may occur because the moment a firm cuts prices competitors will respond by doing the same. There will be elasticity of demand and inelasticity of demand. This change can be seen in the following Figure1. Price is OP and output is OQ. G is the best point both for price and output. At the price higher than P demand is elastic, raising prices will cause loss of market share and less total revenue at this moment. However, at price lower than P demand is inelastic, the total revenue will also decrease. Raising price and reducing price both harm the interests of the oligopolies. That’s why they prefer to use non-price competition to expend market share. Non-price competition includes different types, such as advertising, loyalty schemes, free gifts, special offers and the most important one—branding. Virgin, Orange, Vodafone, One2One are all bandings of mobile phone companies.
Besides oligopoly, there are several other market structures, and Monopoly is one of them. Monopoly is only one firm making products which is no substitutes. Characteristics of monopoly are as follows: large barriers of entry this business exist and it has highly control of price. A firm can well control the supply, but it can’t control the demand of commodity. If the firm wants to supply and sale more, lowering the price will be the best choice. However, if the firm raises its price it may lose some sales. Where monopoly is faced with a falling demand curve then Marginal Revenue will be less than Average Revenue. AR curve coincide with the Demand curve. As the output increases, Marginal Revenue falls below Average Revenue. Without considering of cost, when MR equals to 0, which M shows, the highest Total Revenue may be get. When MC equals to MR (Point N), which means the price is P1 and the quantity sold is Q1, the firm can achieve profit maximization. This is illustrated in the following Figure 2.
According to the given material, profit played two roles in attracting Richard Branson to the mobile phone market. Profit is the reward to Entrepreneurs and the incentive that encourages them to take risks. For enterprisers like Richard Branson, the huge profit of the mobile phone market encourages him to entre this industry though there are great risks like strong competitive and smaller market shares. And the profit from Virgin Mobile will makes him richer because of his business talent. There are also some alternatives to profit maximization. For Richard Branson, it is satisficing behaviour to found and to run Virgin Company. The companies are all expected to behave in a socially responsible way. They have responsible to product high-quality goods for customers, to prove more jobs to unemployed people and to protect the broader environment.
Total Cost curve is an upward line which parallels to the Variable Cost curve. The vertical distance between TC curve and VC curve is the quantity of Fixed Cost. Total cost is the sum of Fixed and Variable costs. The Fixed cost is unchanged, so when nothing is being produced, Fixed Cost equals to Total Cost. As production increase, the Variable cost will rise, which will cause Total Cost rise, too.
Average Cost curve is a U-shape line. Average Cost is influenced by Average Fixed and Variable Cost. As output increase, Average Variable cost will decrease and so will
Average Cost. When output reaches a certain amount, as the inputs of variable factors increases, every additional unit of variable factor of production will be less than the average production of variable factors which is former inputted. At that moment, the Average Cost curve starts to go upwards.
Marginal Cost curve is similar to be a U-shape line. At first, inputs of variable factors are less than inputs of fixed factors. So as the inputs of variable factors increase, the efficiency of production will raise and so will Marginal Cost. When output reaches a certain amount, the efficiency of production will decrease as the inputs of variable factors increase. Then Marginal Cost will increase at that time.
Report:Micro and Macro Theory and Application
