Restriction On The Entry Of New Firm Economics Essay

Monopoly is a single seller and large number of buyers. There is a single seller producing a commodity that has no close substitute. The monopoly market is still solely by mutually beneficial exchange of firm exist and many. Besides that, investigate the impact of a relaxation of the multiple firms assumption on equilibrium.

Introduction to monopoly

Monopoly is a form of market structure where there is a single seller producing a commodity that has no close substitutes. There is no difference between firm and industry and monopoly form as imperfect market. Besides that, monopoly is the sole provider of goods and services.

2.1 Characteristics of Monopoly

There are some characteristics of monopoly market.

One seller and large number of buyers

The one of monopoly characteristic is one seller and large number of buyers is large and the size of each firm is very small. The number of buyers also large and this firm cannot influence the market price. So basically, individual firm does not bother about the reactions of the firm. Besides that, adjusts its sale to earn maximum profits and the price given under perfect competition. The demand of individual buyers relative to the total demand. And so small that cannot influence the price of the product by his individual action.

Product has no lose substitutes

The second characteristics is, product differentiation, there is product are close substitutes but not perfect substitutes. Its means, products are alike but not equal. For an example, Colgate toothpaste is slightly different from Darlie toothpaste. Otherwise, similarly dettol soap is different from life buoy soap. But if the buyers can find any substitutes for toothpaste and soap means, may be the differences is real or imaginary but it’s create attachments. Consumers prefer one product to another, under monopolistic competition. Monopoly cannot exist if there is a competition or any substitute product because consumers or buyers could not find any replacement for the product.

Restriction on the entry of new firm.

The third characteristics of the monopoly are, firm under monopolistic are easy to entry and leave the industry. Barriers are not entry is natural or legal restriction that restricts the entry of new firms into the industry. Hence, a firm has legal control over other firms. There is restricting competition in the market.

Advertising

In monopoly market, advertising is depends to the product sold. If the product is good and services means, the monopoly needs make advertisement to inform consumers on the goods. So that, its try to establish goods of its own products. By the advertising, consumers can know their selling costs. However, if the products are not luxury goods such as water service, electricity service, and local telephone service, then the seller no need to create any advertisement. This is because a lot of the buyers know that where are the places and locations to get and purchase these few products.

2.1.1 Diagram

The Monopolist and Profit Maximization

In the diagram, the quantity of produced and price charged has own control for both of it. That also, entire demand curve for goods and services produced. So that, it will facing a downward slopping demand curve in the diagram. Equivalently, a monopoly never operates in the inelastic portion of its demand curve.

Monopolist Profit Maximization

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What happens if the monopolist later faces a demand curve such as D1? In that case, the monopolist cannot cover costs and will go out of business.

2.1.2 Demand, Marginal Revenue, and Elasticity

http://cyro.cs-territories.com/asa2_economics/unit4/images/monopolisticcompetitionlongrun1.png

In the diagram, demand curve is elastic as there many firms. So that, there is lack of close substitutes. The profits shown as abnormal where the shaded area and competitor the short run.

As shown in the graph above, a monopolist facing demand curve D0 will produce quantity Q0 and the price charged will be equal to P0.

2.1.3 Conclusion

All in all, monopoly have four characteristics of structure. Besides that, monopoly is the sole provider of goods and services. The monopoly market is still solely by mutually beneficial exchange of firm exist and many.

3.0 Difference between Perfect competition, monopolistic competition, oligopoly, and monopoly

Perfect competition, monopolistic competition, oligopoly and monopoly have their own respectively features. Their characteristic of their four markets is not same. In monopoly, the market structure in which there is only one producer and seller for a product. Oligopoly is only few firms that make up an industry and select group of firms has control over the price. Monopoly and oligopoly has high barriers to entry. Then, monopoly structure is opposite for perfect competition. Perfect competition are has many buyers and sellers, many products that are similar in nature and there are many substitutes.

3.1 Differentiate between perfect competition, monopolistic competition, oligopoly and monopoly

3.1.1 Perfect competition

Perfect competition is a market is a possible market where competition is at its greatest in possible level. The products are homogeneous and seller can easily enter and exit from their market.

Number of seller and buyers

Perfect competition is very large numbers of firms in the market. Perfect competition also existence of large number of buyers and sellers. There is no dominating firm and all firms are usually small and are price takers, because the individual sales volume is relatively small compared to market volume. Perfect competition also, has many buyers and sellers, many products that are similar in nature and as a result, many substitutes. This ensures that no single firm can exert market control over price or quantity. If one firm decides to double its output or stop producing entirely, the market is unaffected. The price does not change and there is no discernible change in the quantity exchanged in the market.

Unrestricted to entry and exist

The second characteristics of perfect competition is there are unrestricted on the entry and exist of both buyers and sellers. A firm can easily enter into perfect competition market and leave the market at any time, if that firm cannot continue the firm. The absence of such barriers does not affect the prices, and there is always a substitute for suppliers, who enters and leaves if, wants. If any losses occur the firm will exist the industry without any reason. This is important to understand the free entry and free exist is possible in the long-time firm.

Homogeneous product

There another condition of perfect competition is homogeneous product that is a product offer for sale by seller. It must be goods offers for sale and perfect substitutes of one another seller. One firm cannot differentiate the same products sold in the industry because buyers can identify the difference in terms of colors, quality and packing. There is mean, even though the products are same in nature but there is difference in terms of quality. Seller cannot raise the price above the prevailing price or lower the price. Homogeneity of product has an important implication for the market if products of different seller. Besides that, buyers not care who they buy from, as long as the price is same.

Maximum profits

In the perfect competition, profit maximization determine by the quantity of product they sell. The marginal cost by the product of a single unit of the product is equal to the marginal revenue. Total revenue and total cost approach are the profit maximization. When the cost is lowest, and then only can be maximum profit.

3.1.2 Monopolistic competition

The concept monopolistic competition is more realistic than perfect competition. Monopolistic competition market each firm has its own price policy. The most things from another thing feature of monopolistic competition are the products of various firms are not identified. But they are close substitutes for each others. In the case, monopolistic and perfect competition is characteristic by the existence of sellers. The firms do not produce perfect substitutes. Otherwise, each firm has a small percentage of the total monopolistic market and thus has limited control over market price.

Product differentiates.

Under monopolistic competition, product differentiation may entail physical or qualities differences in the products by their selves. There output product are differentiated between which are relatively close substitutes for each other. So that, that product prices cannot be very much different from each other. Product differentiated by location, services, designs, and brand names. The firms in monopolistic competition will differentiated their products and make them more appealing to the customers in order to maximize their profits.

Control over price

In the short run of monopolistic competition acts like monopoly. Its can increase their prices in at time because they differentiated their product. It is a unique feature of monopolistic competition. In such type of market, due to product differentiation, every firm has to incur some additional expenditure in the form of selling cost. This cost includes sales promotion expenses, advertisement expenses, and salaries of marketing staff. But on account of homogeneous product in perfect competition and zero competition in monopoly, selling cost does not exist there.

3.1.3 Oligopoly

In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly; an oligopoly has high barriers to entry. Main characteristic of oligopoly is interdependence of firms in the industry. Sum more, in the oligopoly market, all firms can earn abnormal profits in the long run because, the entry of new firms are difficult. Oligopoly is not like monopolistic market, because if firms change the prices or output, it has noticed effects on the sales and profits of its competitors.

Small number of large firm

Approaches from small number of large firm are each which is relatively large compared to the overall size of market. Under oligopoly, few firms control the overall industry and there is no specific number of firms that must control the market.

Homogeneous of differentiated product

Under oligopoly, when a product sold that can be either a homogeneous or a differentiated product. For example, petroleum, steel and etc. and also, oligopoly focus on goods sold. Basically, people have different wants needs and thus enjoy variety. Such as, automobiles and computers.

Barriers no entry

Barriers no entry is similar to monopoly market. The oligopoly firms will restrict new entry into the market. In this industry, a few huge firms own most of the available iron ore, a necessary raw material for steel production. Once the new firms are out of the market, there large firms reduce the production will increase the price. In these cases, barriers to entry are low, and it also as small investment may be required to enter the market structure.

3.1.4 Monopoly

Monopoly can be considered opposite of perfect competition. It is a market form in which there are only sellers. Even though, there are many factors to rise up monopoly market. There is only one supplier; and the demand curve that individual firms face is the market demand curve. A monopoly firm is deemed to have considerable control over the price of its product. In the case a monopoly can also arise if a company owns the entire supply of a necessary material needed to produce a product.

3.1.5 Conclusion

Characteristic

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Number of firms

Very Many

Many

Few

One

Type of Product

Homogeneous

Differentiated

Homogeneous / Differentiated

Only product of its kind

(no close substitute)

Ease of entry

Very easy

Relatively easy

Not Easy

Impossible

Price Setting power

Nil

(Price taker)

Somewhat

Limited

Absolute

(Price Maker)

Non Price Competition

None

Considerable

Considerable for a differentiated oligopoly

Somewhat

Productive efficiency

Highly efficient

Less Efficient

Less Efficient

Inefficient

Long run profits

Positive

High

Examples

Doesn’t Exist; agriculture close

Fast Food, retails stores, cosmetics

Cars, Steel, soft drinks, cereals

Small town newspaper, rural gas station

4.0 Conclusion and recommendations

In the whole assignments, I learned about microeconomics subject ant it is a very important subject to whom taking business course. The subject teaches every student about business skills and helps to learn about business knowledge of economics.

In first question, I know the characteristics of monopoly. I also learn the differentiated of monopoly in the markets. The second question is about the differentiate between perfect competition, monopolistic competition, monopoly and oligopoly markets. From this question, I learned about the four characteristics of the markets such as the four markets are not same all the times.

In spite of this assignment, I thank to my lecturer and coordinator for guide us to do this introduction to business. I appreciate from this assignment that I can know well about the business chapters.

Appendix