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Task 04

Consumers will be benefited if there is efficient and effective allocation of resources. But this

will mainly depend on the type of the market structure. Each and every firm in an industry

will belong to one of these market structures. Construction industry is an aggregation of firms

operating within it. It will be really important to identify the characteristics of main market

structures to understand the relative strengths and weakness of each. This will help any

industry to operate well in that particular market.

4.1 Discuss the characteristics of monopoly market structure.

A monopoly is a market structure in which there is only one producer/seller for a product. Entry

into such a market is restricted due to high costs or other impediments, which may be

economic, social or political.

For instance, a government can create a monopoly over an industry that it wants to control,

such as electricity.

Another reason for the barriers against entry into a monopolistic industry is that

oftentimes, one entity has the exclusive rights to a natural resource

High barriers to entry Abnormal profits in long run Firm controls price or output/supply Possibility of price discrimination

Advantages:

May be appropriate if natural monopoly Encourages innovation Development of some products not likely without some guarantee of monopoly in

production

Economies of scale can be gained consumer may benefit

http://www.investopedia.com/terms/m/monopoly.asphttp://www.investopedia.com/terms/m/monopoly.asp

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Disadvantages:

Exploitation of consumer higher prices Potential for supply to be limited - consumer choice limited Potential for inefficiency complacency over controls on costs

4.2 Discuss why perfect competition is efficient.

In this market structure sell an identical product, price-takers, have a relatively small market

share, buyers know the nature of the product being sold, the prices charged by each firm,

Freedom of entry and exit.

So what is efficiency Do the right things

1. Allocative efficiencyAllocative efficiency occurs when there is an optimal distribution of goods and services. This

involves taking into account consumer's preferences. A more precise definition of allocative

efficiency is at an output level where the price equals the Marginal Cost (MC) of production.

This is because the price that consumers are willing to pay is equivalent to the marginal utility

that they get. Therefore the optimal distribution is achieved when the marginal utility of the

good equals the marginal cost. Firms in Perfect competition are said to produce at an

allocatively efficient level, because there, price of the goods are equal to Marginal Cost.

2. Productive EfficiencyProductive efficiency refers to a firm's costs of production and can be applied both to the short

and long run. It is achieved when the output is produced at minimum average total cost (AC).

For example we might consider whether a business is producing close to the low point of its

long run average total cost curve. When this happens the firm is exploiting most of the available

economies of scale. Productive efficiency exists when producers minimize the wastage of

resources in their production processes.

As there are so many competitors in the perfect competition the producers will, anyway, trying

to produce their goods and service at the lowest price on the average cost curve. As well as

here, as almost the goods which are produce here will be simplest production process, there

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may be less wastage than other type of market structure. That is why, the perfect completion

are said to produce at a productive efficiency.

3. Huge amount of sellers4. Perfect knowledge5. Price takers6. Freedom of entry and exit

http://tutor2u.net/economics/content/topics/competition/efficiency.htmhttp://www.economcshelp.org/dictionary/a/allocative-efficiency.htmlhttp://www.economcshelp.org/dictionary/a/allocative-efficiency.htmlhttp://tutor2u.net/economics/content/topics/competition/efficiency.htm