Characteristics Of Perfect Competition Economics Essay

Monopoly is a market structure that is the only sole seller of a product and large number of buyers that have no close substitution and have a high entry and exit barrier. A monopoly markethas no other firms can enter the market and compete with it to produce some good or service. For an example that gave by Vengedasalam, D., et. al. (2008, p.229) If want to subscribe television channel services, the only one will go is Astro. But if want to use Astro services, it have various options to choose from, and this industry is not a monopoly market.

2.1 Characteristics of Monopoly:

Single seller in the market: Monopoly is a price maker in the firm which has the power to control the price. In the proof of the auxiliary theorem Jackson, J. (1998, p.22.5), price maker is a seller of a commodity that is able to affect the price at which a commodity sells by changing the amount it sells.

No Close Substitutes:It means customer or buyers could not find any substitute for the product. If the buyer can find out, then this product is no more in monopoly. In others way to describe, a monopoly cannot exist if there is a competition or any substitute product.

Restriction of entry of new firms: In a monopoly market, there are strict barriers to the entry of new firms. Barriers to entry are natural of legal restrictions that restrict the entry of new firms into the industry.

Average and Marginal Revenue Curves: Under monopoly, average revenue is greater than marginal revenue. Under monopoly, if the firm wants to increase the sale it can do so only when it reduces its price.

2.2 Types of Monopoly

2.2.1 Natural Monopolies

One firm can produce at a lower cost compared to what two or more firms could produce.

2.2.2 Government- Created Monopolies

Government creates monopolies to prevent firms from entering into a market. This can be done through difficulty in obtaining license to operate in the market or providing patent and copyrights to a monopoly firms. There are some legal barriers that are government franchise, government license, patent, copyright and control over raw material.

2.3 Monopoly’s Revenue

A monopolist’s marginal revenue is always less than the price of its good. (According from N. Gregory Mankiw, principle of microeconomics fourth edition pg. 317), shows the example how the monopoly’s revenue might depend on the amount of water produced.

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Table 1: A monopoly’s Total, Average, and Marginal Revenue

Table 1 shows a result that is important for understanding monopoly behavior: A monopolist’s marginal revenue is always less than the price of its good. For monopoly, marginal revenue is lower than price because a monopoly only faces a downward-sloping demand curve.

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Figure 3: Demand and Marginal-Revenue Curves for a Monopoly

The demand curve shows how the quantity affects the price of a good. The marginal-revenue curve shows how the firm’s revenue changes when the quantity increases by 1 unit. Marginal revenue is always less than the price because the price on all units sold must fall if the monopoly increases production

2.4 Profit Maximization

In this graph shows the profit maximization for a monopoly. The point of A is the intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity. All this curves contain all the information we need to determine the level output that a profit-maximizing monopolist will choose.

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Figure 4: Profit Maximization for a monopoly

A monopoly maximizes profit by choosing the quantity at which marginal revenue equals marginal cost (point A). It then uses the demand curve to find the price that will induce consumers to buy that quantity (point B). Thus, the monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curve.

2.4.1 A Monopoly’s Profit

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Figure 5: The monopolist’s Profit

The area of the box BCDE equals the profit of the monopoly firm. The height of the box (BC) is price minus average total cost, which equals profit per unit old. The width of the box (DC) is the number of units sold.

3.0 Characteristics of Market Structures

In a perfectly competitive market, the market structure is an interconnected feature or characteristics in which will affect the nature of competition and the price. For example, the volume and relative strength of buyers and sellers, the degree of collusion among them, level and forms of competition, the extent of product differentiation, and the ease of entry into and exit from the market. Market structures refer to the competitive environment within which a firm operates. Market structures divided into four basic types which is perfect competition, monopolistic competition, oligopoly and monopoly.

3.1 Perfect Competition

Perfect competitive is defined as a market in which there are many buyers and sellers, the products of selling are homogeneous, and sellers can easily enter and exit from the market.

3.2.1 Characteristics of Perfect Competition

Large number of buyers and sellers: Reynolds, R. L., (2005, p.2) points out that the idealized perfect competitive insures that no buyers and sellers has any power or ability to influence the price. The perfect competitive market is price takers.

Products of selling are homogeneous: The firm must sell homogeneous product. The products are where the buyers could not differentiate the products of one seller to another seller.

Easy enter and exit: From the research of Salvatore, D. (2009, p.245) demonstrated that resources or inputs are free to move among the various industries and locations within the market response to monetary incentives. So, there are no artificial barriers to entry into and exit from the industry.

Perfect knowledge: Both of the sellers and buyers have perfect knowledge of the market. Sellers and buyers cannot influence with each other’s.Both of them must know the market price of the goods as given.

Non-price competition: Microeconomics, 2008 Author: Dviga Vengedasalam, Karunagaran Madhavan, Rohana Kamaruddin point out the role of non-price competition is insignificant since many sellers sell the products at a fixed price and furthermore, the products are identical. The firms have no control over the price and their gods are identical, so there is no selling cost.

3.3 Monopoly

Monopoly is single seller in which sell the product is unique. Thus, there are large number of buyers and selling the products that have no close substitution and have high barriers between entry and exit. For an example that gave by Vengedasalam, D., et. al. (2008, p.229) If want to subscribe home telephone services, the only one will go is Telekom Malaysia.

3.3.1 Characteristics of Monopoly

Single seller in the market: Monopoly is a price maker in the firm which has the power to control the price. In the proof of the auxiliary theorem Jackson, J. (1998, p.22.5), price maker is a seller of a commodity that is able to affect the price at which a commodity sells by changing the amount it sells.

No Close Substitutes: It means customer or buyers could not find any substitute for the product. If the buyer can find out, then this product is no more in monopoly. In others way to describe, a monopoly cannot exist if there is a competition or any substitute product.

Strong barriers to the entry into the industry exist: In a monopoly market there is strong barrier on the entry of new firms. Monopolist faces no competition. The monopolist has absolute control over the production and sale of the commodity certain economic barriers are imposed on the entry.

3.4 Monopolistic Competition

Microeconomics, 2008 Author: Dviga Vengedasalam, Karunagaran Madhavan, Rohana Kamaruddin points out that the Monopolistic competition is a market structure in which there are large numbers of small sellers’ differentiated products but these are close substitute products and have easy entry into and exit from the market.

3.4.1 Characteristics of Monopolistic Competition

Large numbers of seller and buyers: It is less as compared to perfect competition. Because, monopolistic competition will produces different or unique products, so that they will have some control over the prices. Hence, each firm will follows an independent of the price output policy.

Product differentiation:Each firm produces a product that is at least slightly different from those of other firms. For example, if coffee is sold in coffee pack only, then it is perfect competition. But, if the same coffee is mixed with chocolate packaged in a box and label as “Choco-Coffee”, then this product is in monopolistic competition.

Easy entry and exit:This is freedom to entry of new firms, but it is not as easy as perfect competition because it needs to make some differentiate product enter the monopolistic competition.

3.5 Oligopoly

According to the preservearticles.com, Oligopoly is often referred to as “competition among the few”. In brief oligopoly is a kind of imperfect market where there are a few firm in the market, producing either and homogeneous product or producing product which are close but not perfect substitutes of each other.

3.5.1 Characteristics of Oligopoly

Few numbers of firms: The firms are few but the size of firms is large. In few firms will control the overall industry under oligopoly. For example of the oligopoly which is Unisem and Carsem.

Homogeneous and differentiated product: The firms in an oligopolistic industry may produce standardized or differentiated products. For example, DIGI or U-mobile produced by one firm is identical to another firm.

Mutual interdependence: The author further stated that oligopoly always consider in choosing price, sales target, advertising budgets and other.

Price rigidity:According to the preservearticles.com, there is the existence price rigidity. Prices lend to be rigid and sticky. If any firm makes a price-cut it is immediately retaliated by the rival firms by the same practice of price-cut. There occurs a price-war in the oligopolistic condition.

3.7The Differences between the various characteristics with the four types of market structure

The various characteristics between the four types of market structure which are Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly have been discussed. The most important of these characteristics are differentiate in which will affect the nature of competition and the price. Therefore, table 2 shows the differentiation of the characteristics of the following market structure.

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Barriers to entry

Low

Low

High

Very High

Number of Producers

Many

Many

Few

One

Types of product

Standardized

Differentiated

Standardized or Differentiated

Unique

Example

Fruit& Vegetables

100 Plus

Carsem

Astro

Table 2: Characteristics of market structure

4.0 Conclusion and Recommendation

As my conclusion, I think that monopoly is the best in microeconomic. This is because monopoly is a form that is the sole seller of a product without close substitutes. It remains other firms cannot enter the market and complete with it.