Competition And Markets Case Competition And Market Power

Competition And Marketsecon 5 Casecompetition And Market Powerreview T

Review the following question and prepare a four to five page paper answering the following questions: 1. Explain the difference between the demand curve facing a monopoly firm and the demand curve facing a perfectly competitive firm. 2. Which of the following is (are) most likely to be produced under conditions resembling perfect competition-Automobiles, beer, corn, diamonds, and eggs. Defend your answer in economic terms. 3. Name one monopoly firm you deal with. What is the source of its monopoly power? Do you think it seeks to maximize its profits? 4. This module focused on four types of firms: a. perfectly competitive b. monopoly c. monopolistic competitive d. oligopoly Which of the above firms would most likely have a zero economic profit in the long run (can be more than one type)? Explain your answer fully.

Sample Paper For Above instruction

Understanding the dynamics of different market structures is fundamental to grasping how markets operate and how firms behave within those structures. This paper explores the critical differences between monopolistic and perfectly competitive demand curves, assesses which goods are typically produced under perfect competition, examines a real-world monopoly, and analyzes the long-term profitability of various firm types.

Differences in Demand Curves: Monopoly vs. Perfect Competition

The demand curve faced by a firm fundamentally depends on market structure. In perfect competition, the demand curve for an individual firm is perfectly elastic, represented as a horizontal line at the market price. This implies that the firm can sell any quantity of goods at the prevailing market price but has no power to influence that price because numerous small firms produce identical products. Consequently, the firm's demand curve coincides with the market supply and demand, rendering its marginal revenue equal to the price.

Conversely, a monopoly faces a downward-sloping demand curve because it is the sole provider of that good or service in the market. This curve reflects the inverse relationship between price and quantity demanded; to sell an additional unit, a monopoly must lower the price, which affects all units sold. As a result, the marginal revenue curve for a monopoly lies below its demand curve, since increasing sales involves reducing the price on all units. This creates a situation where the monopoly's demand curve is more elastic at higher quantities, but the marginal revenue diminishes faster than the price, influencing how the firm sets output to maximize profit.

Goods Likely to Be Produced Under Perfect Competition

In market sectors that resemble perfect competition, numerous small firms produce homogeneous products, selling virtually identical goods. Examples include commodities like corn, eggs, and, to some extent, beer and diamonds — though diamonds are often considered an oligopoly due to significant brand differentiation and market control. Automobiles, however, are less characteristic of perfect competition because of high entry barriers and product differentiation.

Therefore, corn and eggs are most likely produced under conditions resembling perfect competition because they are standardized commodities with many producers competing on price. This aligns with economic theory, which suggests that in perfect competition, firms are price takers and cannot influence market prices. Such markets tend to have free entry and exit, leading to zero economic profits in the long run, as all firms earn just enough to cover opportunity costs.

Real-World Monopoly and Its Power

An example of a monopoly firm is the local electric utility provider in many regions. The source of its monopoly power often stems from natural monopoly characteristics—such as high infrastructure costs, economies of scale, and legal barriers like licensing or patents, which prevent other firms from entering the market. Due to its exclusive control over essential infrastructure, the electric utility can set prices above marginal costs to maximize profits.

Regarding profit maximization, most monopolies aim to maximize profits by setting price and output where marginal revenue equals marginal cost. While profit motives are inherent, some monopolies may be regulated to prevent excessive pricing and abuse of market power. Nonetheless, within regulatory limits, a monopoly generally seeks to maximize its profits because doing so directly increases shareholder value and sustains its market dominance.

Profitability of Different Firm Types in the Long Run

In the long run, perfectly competitive firms typically experience zero economic profit. This outcome results from free entry and exit; if firms earn above-normal profits, new entrants are attracted, increasing supply, and pushing prices down until only normal profits remain. Conversely, monopolies and oligopolies often sustain positive economic profits over time due to barriers to entry that prevent competing firms from eroding their market power.

Monopolistic competitive firms, characterized by product differentiation, may also return to a break-even point in the long run. The presence of free entry and exit in this market leads to a situation where firms earn zero economic profit in equilibrium, akin to perfect competition, as any economic profit attracts new competitors, undermining their profitability. However, due to product differentiation, monopolistic competitors can earn short-term profits and have some pricing power, but these profits tend to dissipate in the long run.

Thus, the firms most likely to have zero economic profit in the long run are those operating under perfect competition and monopolistic competition, owing to the ease of entry and exit. Monopoly and oligopoly firms, protected by high barriers, often maintain positive economic profits in the long run, although they may face regulatory constraints.

Conclusion

Market structures profoundly influence firm behavior, demand elasticity, and profitability. While perfect competition enforces zero long-term economic profits due to free entry, monopolies can sustain profits through barriers and control over essential resources. Recognizing these distinctions is essential for understanding market efficiency, consumer choice, and regulatory policies aimed at promoting fair competition.

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