Economic Fundamentals: Market Structures & Inflation

Microeconomic Market Structures

Oligopoly

An oligopoly is a market structure characterized by a few suppliers. The size of each company is relatively large compared to the total market supply. In an oligopolistic market, each bidder can significantly affect the price by varying its supply. The product is often homogeneous, meaning oligopolistic firms compete with each other, as their products are identical. There are also barriers to entry, similar to a monopoly, where production takes place in large companies that require substantial investment, making it difficult for new companies to enter.

Profit Maximization

Firms maximize their benefits when marginal revenue (MR) matches marginal cost (MC).

Firm Agreements (Collusion)

If one oligopolistic company lowers its price and others do not, its demand will increase at the expense of the others. To prevent this, firms often form agreements known as cartels. These are agreements between companies in an oligopolistic market to eliminate competition among themselves, typically covering quantities produced and prices charged.

Monopolistic Competition

In a market with monopolistic competition, there are many suppliers. The supply of each company is relatively small compared to the total market. The product is not homogeneous; existing products on the market perform the same function and meet essentially the same need, but they are differentiated. There are no entry barriers.

Profit Maximization in Monopolistic Competition

Firms maximize their benefits when marginal revenue (MR) equals marginal cost (MC).

Barriers to Entry

Barriers to entry are obstacles that prevent new firms from entering a market. Key types include:

• Absolute Cost Advantages

  These occur when established firms possess superior production techniques, allowing them to produce at a lower cost.

• Product Differentiation Advantages

  These arise from strong product differentiation. Established companies have an advantage over potential entrants due to existing consumer loyalty.

• High Capital Requirements

  The requirement for high capital investment poses a significant barrier for potential entrant companies. These firms may face problems financing investments due to the difficulty in attracting external resources.

• Economies of Scale

  Economies of scale are a goal sought by many companies and can be of two types:

  • Internal Economies of Scale: These occur within a single firm and are the result of greater efficiency due to increased scale.
  • External Economies of Scale: These affect an entire sector, benefiting all firms within it.

Macroeconomic Principles

Macroeconomics Defined

Macroeconomics is the economic science that studies the behavior of the economy from a global perspective, without considering the individual analysis of the behaviors of different economic actors.

Macroeconomic Indicators

Macroeconomic indicators are the tools used by economists to determine the current position or state of an economy.

General Price Level

The general price level is a global measure of the prices of various goods and services at any given time.

Inflation

Inflation is a general and sustained increase in prices across the economy of a country.

Effects of Inflation

Inflation has several significant effects:

• It harms individuals whose incomes do not increase at the same rate as prices.
• It harms individuals who have a fixed amount of saved funds.
• It benefits debtors and harms creditors.
• It decreases the competitiveness of a country's products abroad.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) determines the general price level by taking into account only the prices of goods and services directly acquired by consumers.