Perfect Competition and Monopoly Essay Example
Question 3 Perfect Competition and Monopoly
(a) I. Explain perfect competition and monopoly market structures, and identify the key factors that distinguish them.
Perfect Competition Market
In economic theory, the perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. According to the website wordIQ.com, in order to classify the market is a perfect competition market, the market must match below criteria: 1. There are a large number of small producers and consumers on a given market 2. None of the producers or consumers can influence the price on their own (ie. Price takers) 3. Goods and services are perfect substitute (ie. The goods or services is homogeneous) 4. All resources are perfectly mobile 5. There is no transaction cost 6. The price is determined at the level that equates supply and demand, and moves instantaneously to equilibrium
Monopoly Market Structure
A monopoly market structure is completely different from the perfect market structure. It is a persistent market, with one and only supplier of the particular product or service. Since there is only one supplier, it can control the supply level, and therefore, it has the power to influence prices in the market.
Key factors that distinguish Perfect Competition Market and Monopoly Market Structure
There are three main factors to distinguish a Perfect Competition Market and a Monopoly Market structures, which are seller entry barriers, number of sellers, and the nature of the products.
Seller entry barrier is one of the key factors. For Perfect Competition market, there is no or little barrier. For seller entry barriers, they include government regulations, patents, import/export restrictions or large investment and start up costs. According to Sloman and Norris (1997), there is complete freedom of entry for firms and established firms are unable to stop new firms entering the market.
(a) I. Explain perfect competition and monopoly market structures, and identify the key factors that distinguish them.
Perfect Competition Market
In economic theory, the perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. According to the website wordIQ.com, in order to classify the market is a perfect competition market, the market must match below criteria: 1. There are a large number of small producers and consumers on a given market 2. None of the producers or consumers can influence the price on their own (ie. Price takers) 3. Goods and services are perfect substitute (ie. The goods or services is homogeneous) 4. All resources are perfectly mobile 5. There is no transaction cost 6. The price is determined at the level that equates supply and demand, and moves instantaneously to equilibrium
Monopoly Market Structure
A monopoly market structure is completely different from the perfect market structure. It is a persistent market, with one and only supplier of the particular product or service. Since there is only one supplier, it can control the supply level, and therefore, it has the power to influence prices in the market.
Key factors that distinguish Perfect Competition Market and Monopoly Market Structure
There are three main factors to distinguish a Perfect Competition Market and a Monopoly Market structures, which are seller entry barriers, number of sellers, and the nature of the products.
Seller entry barrier is one of the key factors. For Perfect Competition market, there is no or little barrier. For seller entry barriers, they include government regulations, patents, import/export restrictions or large investment and start up costs. According to Sloman and Norris (1997), there is complete freedom of entry for firms and established firms are unable to stop new firms entering the market.