Microeconomics

Microeconomics Writing Assignment

Introduction

Microeconomics is the study of economic decisions made by individual entities, and emphasizes the relationship between a buyer and seller in given markets and how that relationship influences a firm’s product decisions. Important microeconomics topics include perfectly competitive markets, monopolistically competitive markets, oligopolistic markets, monopolistic markets, economic profits, and efficient allocation of resources.

Perfectly Competitive Markets

Perfectly competitive markets are an idealized model useful for comparison to other markets, but ultimately unachievable as the criteria that defines the model are unrealistic extrapolations of aspects of the market to their favorable extremes. Conditions of a perfectly competitive market include numerous buyers and sellers, firms with identical products, no barrier to entry or exit, no costs associated with advertising, perfect consumer knowledge, perfect mobility for factors of production, complete absence of government intervention, no costs associated with transportation of raw materials or products, standardized profits across all firms (no long term profits), and every firm must be a price taker. No current real-world market has met these idealized conditions[4].

Monopolistically Competitive Markets

A monopolistically competitive market is a common model of competition in which firms may face a high amount of competition from many other firms, but with each firm offering a slightly different product upon which it has a monopoly. Firms are independent, but readily share knowledge—with no condition the knowledge be perfect. There are no barriers to leaving or entering the market. The central aspect of monopolistically competitive markets is the slight differentiation of products. This differentiation benefits the consumer by providing a larger number of options of products that are fundamentally the same, while allowing for greater customization of the details fitting consumer demands, ultimately resulting in greater consumer satisfaction[6].

Oligopolistic Markets

An oligopolistic market is a market model characterized by domination of the market by a few sellers, who ultimately control price. These sellers may be selling identical or differentiated products. All firms engage in advertising. There are no barriers for a firm to exit, but there are barriers to entering the market. Firms are interdependent, and must respond to actions of other firms in the oligopoly to remain competitive[9]. Three real world examples include smart phones, pharmaceuticals, and health insurance. The market for smart phone operating systems and related products is dominated heavily by Google and Apple. The pharmaceutical industry is dominated by wealthy companies like Pfizer, Novartis, and Merck, who can afford to continue developing pharmaceutical products despite rising costs. Health Insurance in the wake of the Affordable Care Act has heavily favored companies like Cigna, Aetna, and Humana[5].

Monopolistic Markets

A monopolistic market is a market model in which a single firm offers products or services to the consumer. Characteristics include the ability to set prices, control output, and take in super-nominal profits long term-- all while having an absolute barrier to entry[7]. Patents serve as a real-world barrier to entry into the market, seemingly encouraging a monopoly, albeit temporarily. The patent system ultimately creates benefits for society by rewarding innovation, investment, and research with continued financial return[2].

Economic Profits and Allocation of Resources

In the long run, perfectly competitive markets will always lead to zero economic profits. The variables that lead to profit are essentially extrapolated to infinity, or the best-case scenario, such as perfect consumer information, no barriers to entry, no transportation or advertising costs, etc. so when short term profits are made by one firm, other firms leave less profitable industries and enter