Market Structures

Explain why in competitive markets there can be profit or producer surplus in the short run but not the long run. Include the idea of “economic rent” for exceptionally productive inputs. Then imagine a firm with the same cost structure but in each of the four very distinct market structures: (1) Purely Competitive, (2) Monopolistically Competitive, (3) Oligopoly, and (4) Monopoly. Using the concepts of consumer surplus and producer surplus, explain the behaviors and long run outcome in each market structure.
That is an interesting applicaiton to your own personal budget. So, what parts of your budget are fixed (until the long run) vs. variable? Can you give an example (no need to use numbers)?
IF you were a business owner, would you prefer to operate a business in perfect competition, monopolistic competition, oligopoly or monopoly? why?

Answer

Market Structures
Name
Institution

In a competitive market, there are many firms each producing the same or homogenous product (Hall & Lieberman, 2012). Therefore, no one firm can influence the market price. This implies that each firm operating in a competitive market is a price-taker. That is, the firm sales its goods at the prevailing market price. The reason there can be supernormal profit or producer surplus in the short run but not in the long run is the feature of free entry and exit of firms in a competitive market (Hall & Lieberman, 2012). Therefore, if a firm is making supernormal profit in the short-run, other firms will be attracted to the market by seeing huge profits. Hence, in the long-run the number of firms producing the same product will increase. Therefore, the marginal revenue will decrease in the long-run back to a point where the firm can no longer enjoy producer surplus or supernormal profits.
For exceptionally productive inputs such as capital, land and labor, W = P * dX/dL. Where, W is the rent of the factor P is price, X is output, and L is labor. In a competitive marketplace, the prices of goods are fixed and, therefore, economic rent depends on the change in output and labor (Mankiw, 2011). It is imperative to note that, the marginal productivity of exceptionally productive input is higher than other normal input and thus, economic rent is also higher.
In a monopolistic competitive market, there is product differentiation (Nikaido, 2015). In the long-Run, producer surplus will decrease and consumer surplus increases. This is because new firms will be attracted in the market reducing the marginal revenue. There are few firms in the market in an oligopolistic market. Price of products in an oligopoly is relatively rigid. Thus, firms in an oligopolistic market may not enjoy producer surplus because increasing or decreasing the price will lead to loss of revenue (Mankiw, 2011). In a monopoly, there is a sole firm in the whole market and often charge high prices. Therefore, a firm in a monopoly market enjoy producer surplus.
Rent, electricity, water and education payments on my personal budget are fixed. However, the budget for groceries, fast food, entertainment and other secondary needs are variable and depend on the remaining income after paying for fixed expenses such as rent.
If I was a business owner, I would prefer to operate on a monopolistic market. The reason is because products in a monopolistic market are differentiated, and thus one can build brand loyalty through marketing strategies.

References
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6)(Vol. 6). Princeton University Press.
Hall, R., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning.
Mankiw, N. G. (2011). Principles of economics. Mason, Ohio: Thomson South-Western.