Why perfect competition??
Executive Summary
This report provides information related to the four main market structures and why perfect competition is the most efficient. Features of four market structures and comparison of monopoly and perfect competition.
Perfect completion is most efficient
Subject matter
Details
Conclusions
Introduction
Market structure is best defined as the organizational and other characteristics of a market. We focus on those characteristics which affect the nature of competition and pricing.Traditionally, the most important features of market structure are:
1. Number of Buyers and Sellers:
Number of buyers and sellers of a
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an individual firm has no control over the price and has to accept the price as determined by the market forces of demand and supply.
Monopoly:
A monopolist is a Price-Maker, i.e., a firm has complete control over the price and fixes its own price.
Monopolistic Competition:
A firm under monopolistic competition has partial control over the price, i.e. each firm is neither a price-taker nor a price-maker. An individual firm is able to influence the price by creating a differentiated image of its product through heavy selling costs.
Oligopoly:
A firm under oligopoly follows the policy of price rigidity. Although, the firm can influence the prices, but it prefers to stick to its prices so as to avoid a price war.
(II) Nature of Demand Curve:
i. Perfect Competition:
The demand curve for a perfectly competitive firm is perfectly elastic as it has to accept the price fixed by the market forces of demand and supply. ii. Monopoly:
The monopoly firm faces a downward sloping demand curve as more quantity can be sold only at a lower price. iii. Monopolistic Competition:
The firm under monopolistic competition also faces a downward sloping demand curve as more quantity can be sold only at a lower price. However, the demand curve is more elastic in comparison to demand curve under monopoly because of presence of close substitutes. iv. Oligopoly:
The demand curve for an oligopoly firm is indeterminate, i.e. it cannot be drawn accurately as exact
This graph is specific to an oligopoly and shows the change in quantity demanded in relation to the change in price for both elastic and inelastic goods. Total Revenues will be increased, if the firm decreases their price but increase their quantity. Due to the fact that the costs remain the same, the revenue line on the graph can be seen to be steeper than the costs meaning that the profit is higher. The graph therefore also indicates the point where the firm is able to make the most amount of profit, in relation to the price they set and the quantity they produce.
An oligopolistic market is one that has several dominant firms with the power to influence the market they are in; an example of this could be the supermarket industry which is dominated by several firms such as Tesco, Sainsbury’s, and Waitrose etc... Furthermore an oligopolistic market can be defined in terms of its structure and its conduct, which involve various different aspects of economics.
A major feature of an oligopoly market is that any singular firm has the power to set market prices. This is evident in the example of Coles and Woolworths in Australia as they dominate the market share with 72.5%. Due to there only being a small number of firms, they are able to set their prices and change price and
e. Firms that are price makers…/a monopoly is a price maker as it holds a large amount of power over the price it charges.
Since a monopoly is the only seller of a good in the market, the demand curve is the market demand curve. Therefore a monopoly has a downward sloping demand curve, in contrast to the horizontal sloping demand curve of a firm in a competitive market (Mankiw, 2014). Monopolies aim to find the profit-maximizing price for its product. If a firm is initially producing at a low level of output, marginal revenue exceeds marginal costs (Mankiw, 2014). Every time production increases by one unit, the marginal revenue increases again and is greater than marginal costs (Mankiw, 2014). Therefore
· A monopolist would not be able to increase prices if the demand for a particuar product is elastic.
Hint : Typically, in a monopolistic competition industry, if one company increases price, the other company also increases their price to make more revenue in the long term.
As against his a competitive firm cannot change different prices from different buyers since he faces a perfectly elastic demand at the going market price. If he increases a slights rise in price he will lose the sellers and makes loss. Thus a competitive firm cannot discriminate prices which a monopolist can do.
(Demand Under Perfect Competition) What type of demand curve does a perfectly competitive firm face Why
In a perfectly competitive market each firm is a “Price Taker” , i.e. the prices and wages are determined by the market and the firm is so small relative to the size of the market that they can have no influence over the market price. For a market to be
In oligopoly market, each firm has substantial market power with high degree of interdependence. The key for success in a oligopoly market is to gain more market share than the competitors. Increasing the price can lead to loss of market share to the competitors, so in the oligopoly market, if a firm decreases the price, the other firms will always follow, but if a firm increase the price, the other firms will not follow. The demand curve is kinked.
Firms within the fast food industry fall under the market structure of perfect competition. Market structure is a classification system for the key traits of a market. The characteristics of perfect competition include: large number of buyers and sellers, easy entry to and exit from the market, homogeneous products, and the firm is the price taker. Many fast food franchises fit all or most of these characteristics.
If the business is a monopolist, then it has price-setting power. At the other extreme, if a firm
Different market structures are basically compared by the number of competing firms and the extent of entry barriers.