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Introduction
There are four market structures; perfect competition, pure monopoly, monopolistic competition and oligopoly. These four each have their own distinct, and in some cases, similar characteristics. In this paper, I will highlight these characteristics and depict and explain each of the pricing strategies, demand and cost curves. However, the true reason for doing so is to distinguish each market structure from the other to truly understand how a firm makes it pricing and supply decisions, and how these decisions affect the firm in both the short and long run.
For the paper, I decided to look at Imperial Cafeteria and Take Away as a possible base for discussions. It is a monopolistically competitive firm because: 1.) they share the market with many other firms, 2.) they advertise highly on radio as well as on television, 3.) their products are similar to others in the market, but is differentiated when considering service, quality and location, and 4.) there is easy entry and exit in this market. Sure, these are all characteristics of monopolistic competition, but how does Imperial's determine it profit maximizing point, or point of productive efficiency? These questions will all be answered shortly.
Perfect Competition
A perfectly competitive market is described as one where no single producer or consumer has the power to influence price or quantity. Firms in these markets are a price taker, which means that the market sets the price that they must abide by. In this market structure, large numbers of buyers and sellers, each who are so small that they produce an exceedingly small fraction of total output, therefore, each firm's actions have no significant impact on others. These fir ...