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Level Of Control Over Price By Individual Firms Economics Essay

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Published: Mon, 5 Dec 2016

Microeconomics is focuses on patterns of supply and demand and determination of price and output in individual markets. Therefore, even in a free enterprise system, not all industries are equally competitive. This is because economists have identified four degrees of competition such as perfect competition, monopolistic competition, oligopoly and monopoly. So, in here I will discuss about the characteristics of monopoly.

1.1Monopoly

Monopoly market means that it has only one producer on the market. A sole supplier can control over the prices of its product. For example, it will decrease in consumer demand due to increased prices. Therefore, a market or industry in which there is only one producer, which can therefore set the prices of its products.

1.2Characteristics of Monopoly

1.2.1Number of Competitors

Monopoly does not have any number of competitors. This is because under monopoly, there is a single producer of a particular service in the market accruing to a rather large number of buyers. In addition, other competitors just produce simple goods or service and lack of innovation therefore the number of competitors’ decrease. So, a business becomes a monopoly it must keep to change and innovation to produce a unique product.

1.2.2Ease of entry into industry

Under monopoly, it regulated by government. This is because the government gives a singles firm the exclusive right to produce some good. Besides this, a few of the primary barriers such as government license or franchise, resource ownership, patents and copyright, and high start-up cost also effect to entry into this market. For example, company Astro, it must have government license, homogeneous product, a large capital and resource ownership. So, to be the sole seller, in the monopolistic setup, a special product must be produced.

1.2.3Similarity of goods or services offered by competing firms

Under monopoly, it wills not directly competing goods or services. This is because theyhavetheir own unique goods and services for the buyers. For example, the electric companies that produce electricity to all user. In other hand, another company just produce some simple goods such as food, drinks, clothes, and goods. Therefore, based on the example we can see that under the monopoly, the company will not directly competing goods or services with other company.

1.2.4 Level of control over price by individual firms

Under monopoly, it can control the price of the product. This is because no competitors compete with it so it can randomly set the price to gain the maximum profits. Thus, a monopolist is a ‘price maker’ and not a ‘price taker’; when it decides the price and the buyers have to accept it. For example, top manager of companyAstro he announce the prices of one channel will increase from $150 to $200 in year 2012 therefore all the user must follow and accept it. So, under the monopoly seller can make decision on setting the prices of the goods or services.

1.2.5 Diagram

Super-normal profits

Monopolies can maintain super-normal profits in the long run. As with all firms, profits are maximised when MC = MR. Therefore, the level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero. At profit maximisation, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC).

Deadweight loss

Based on the diagram assumes that average cost is constant, and equal to marginal cost (ATC = MC).Under perfect competition, equilibrium price and output is at P and Q. If the market is controlled by a single firm, equilibrium for the firm is where MC = MR, at P1 and Q1. Under monopoly the area of welfare is P, F, C, and B. Therefore, the deadweight loss is the area B, C, A.

1.3 Conclusion

In my conclusion, the features of monopoly are none of competitors, hard of entry into industry, sell a unique goods and services, and can set the prices randomly to gain the maximum profits. So, in the four degrees of competition in a private enterprise the monopoly is the one way to gain maximum profits compare with other competition.

2.0 Introduction

Microeconomics is the branch of economics that market behaviour of individual consumers and firms in an attempt to understand the decision-making process of firms and households and concerned with the interaction between individual buyers and sellers. Therefore, even in a free enterprise system, not all industries are equally competitive. This is because economists have identified four degrees of competition such as perfect competition, monopolistic competition, oligopoly and monopoly. So, I will discuss about the differentiate features of four degrees of competition.

2.1 Number of competitors

Under perfect competition they are many of competitors compare with monopoly. This is because monopoly are none competitors in the market. Besides this, under monopolistic competition there are many competitors but fewer than in perfect competition. Lastly, under oligopoly they are few of competitors compare with perfect competition and monopolistic competition. Agriculture is the example of perfect competition. However, restaurant industry or supermarket is another example of monopolistic competition. Besides this, steel industry is the example of oligopoly. Lastly, the examples of monopoly are water service, cable television and electric company. So, monopoly that are none competitors compare with other three type of competitive.

2.2 Ease of entry into industry

Under perfect competition each firm is small, therefore it is easy for firms to enter or leave the markets. For example, the vegetable produced on one farm is the same as that from another. Therefore, it is relatively easy to start producing vegetable and relatively easy to stop when it’s no longer profitable. Under monopolistic competition business may be large or small, but they can still enter or leave the market easily. However, under oligopoly the entry of new competitors is very difficult because it need a large of capital investment. For example, the oligopolistic industries such as airline, steel industries and automobile all also need a large capital investment to entry. Lastly, under monopoly entry into industry are controlling by the government. For example, water service it control by the government. So, perfect competition and monopolistic competition are easy entry or leave compare with monopoly and oligopoly.

2.3 Similarity of goods or services

Under perfect competition is the market characterized by numerous small firms which are producing same product. Agriculture is the example of perfect competition such as milk, vegetable, wheat corn and coffee. However, under monopolistic competition sellers to make products at least seem to differ from those of competitors. For example, they differentiating strategies include brand names, design, styling, and advertising such as Nike, Starbuck, KFC, Organic vegetable and McDonald. Besides this, under oligopoly the products are large capital investment is needed by the competitors such as steel, airline, aluminium and diamond. Lastly, under monopoly the product and services are no directly competing with other firm such as water service, electric companies, and cable television. So, the products of perfect competition are identical compare with three type of competition.

2.4 Level of control over prices

Under perfect competition the price are set exclusively by supply and demand and accepted by both sellers and buyers. Therefore, both buyers and sellers know the prices that others are paying and receiving in the marketplace. For example, the prices of milk are set by supply and demand is $1.5 per bottle. Therefore, all the buyer and sellers know the price so seller cannot change the price randomly. However, under monopolistic competition the prices sometimes can set by the sellers themselves depending on the design, brand name, styling and advertising. For example, the chicken sell in the KFC is $10. On the other hand, the chicken sell in the market is $5. So, we can see the different between the prices of KFC and Market. But the prices are not set too high because buyer won’t buy the goods. Under oligopoly, they have more control over their strategies than monopolistically competitive firm but the action ofone firm can significantly affect the sales of every other firm in industry. For instance, when Public Bank incentives offer to increase sales, the others Bank usually protect sales by doing the same. Lastly, under monopoly a sole supplier complete control the price of its products. Its only constraint is a decrease in consumer demand due to increased prices. For example, electric company increase the price of electricity such as from $20 per watt to $35 per watt so all the users must accept and follow the price. So, monopoly is a “price maker” not a “price taker” compare with other competitors.

2.5 Conclusion

Characteristic

Perfect

Competition

Monopolistic

Competition

Oligopoly

Monopoly

Number of competitors

Many

Many, but fewer than in perfect competition

Few

None

Ease of entry into industry

Easy

Fairly easy

Difficult

Regulated by government

Similarity of goods and services

Identical

Similar

Similar or different

No directly competing goods or services

Level of control over price by individual firms

None

Some

Some

Considerable

Example

Agriculture

Supermarket

Steel Industries

Electric Company

Conclusion

In my conclusion, I learn all the characteristic of perfect competition, monopolistic competition, oligopoly and monopoly. For example, monopoly can control the prices of goods and service compare with other competition, monopoly can product a unique goods therefore it will not similar to other competition. So, monopoly is best compare with each other.


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