For each of the following statements, identify the type of market it describes. Use an example from the readings or the internet for each characteristic and explain your choice.
A. The company practices product differentiation
B. The firm earns an economic profit in the long run
C. Maximizes profits by equating MC and MR
D. Has demand curve that is downward sloping
E. Is in a market where new firms can enter the industry selling similar products
A. The company practices product differentiation: This describes a monopolistically competitive market. In this type of market, companies differentiate their products to make them stand out from their competitors. They do this by creating unique features, branding, packaging, or advertising. One example is the smartphone market, where companies like Apple, Samsung, and Google differentiate their products through design, operating system, and features.
B. The firm earns an economic profit in the long run: This describes a monopoly market. In a monopoly, there is only one seller in the market, giving them significant market power. With limited or no competition, a monopoly can earn an economic profit in the long run by setting prices higher than their costs. An example of a monopoly is a utility company that has exclusive rights to provide electricity or water in a certain area.
C. Maximizes profits by equating MC and MR: This describes a perfectly competitive market. In a perfectly competitive market, there are many buyers and sellers, and products are homogeneous. The firm, as a price taker, maximizes its profits by equating its marginal cost (MC) and marginal revenue (MR). This means that the firm produces the quantity where the additional cost of producing one more unit equals the additional revenue earned from selling that unit. A classic example is the agricultural market, where individual farmers are price takers and have no influence over the market price.
D. Has demand curve that is downward sloping: This describes a monopoly market or an oligopoly market. In both cases, there is limited or no close competition. In a monopoly, there is only one seller with significant market power. In an oligopoly, there are a few dominant sellers who can influence the market price. In both cases, the demand curve slopes downward because consumers are willing to buy less quantity as the price increases. An example of an oligopoly market is the automobile industry, where a few big companies like Ford, GM, and Toyota dominate the market.
E. Is in a market where new firms can enter the industry selling similar products: This describes a monopolistic competition market. In monopolistic competition, there are many sellers offering differentiated products, and new firms can enter the industry selling similar but slightly differentiated products. An example is the fast food industry, where new restaurants can enter the market and offer similar products with their unique branding or menu items.