To understand why firms make the choices they do in the business environment we must understand the structure of the market which exists in competitive capitalism. It is important to be able to distinguish between types of markets to better understand how they behave in the real world.
Why firms behave the way they do depends on a number of considerations, such as the number of buyers and sellers in market, and to what extent buyers being the consumers can distinguish between different outputs being the product or service, of the different sellers. It can also depend on the accessibility firms can enter and leave an industry and what kind of constraints a government places on the firm's activities.
Not all markets are structured in the same way therefore there are several types of markets that exist. The ability for a firm to maximize its profits results to the economic choices made by firms that determine the constraints with which they face in markets.
Market constraints vary depending on the organizational characteristics of the market in which a firm makes its decisions. Table 1.1 outlines the key characteristics that determine a particular market structure.
1 Number of participants in the market
2 Extent to which the product produced and sold by a firm is homogenous or differentiated
3 Extent to which established firms have a competitive advantage over new firms seeking to enter the market as buyers
The organizational characteristics of the market significantly influence the economic choices made by firms. Economists identify four types of market structure that are found in a capitalized economy. Using the four structure types allows economists to explain the behaviour of firms in the market. Understanding the basic approach taken by economists is to ensure they explain and predict the...