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Microeconomics is the study of the behavior and an individual form of economy. The examples of individual form are consumer, household or firm. The main concerns of microeconomics are the factors that give impact on the individual economic choices, how these factors effects the decision maker, how markets coordinate their choices and how to determine the prices and demand in market.
Monopoly is a large firm with an only one seller that provides no substitution in the market. The main characteristics of monopoly are a high barrier of entry, as a price maker and maintain super-normal profit.
The competition in free market are included these four types- perfect competition, monopolistic competition, oligopoly and monopoly.
Introduction to monopoly
The form of the word 'monopoly' is from two Greek words- 'Mono' which means single and 'Poly' means seller. Therefore, single seller is the meaning of monopoly. There is no competition under monopoly too. Moreover, natural monopoly, government monopoly, geographical monopoly and technological monopoly are 4 types of monopolies. The advantages of monopoly are earning a country valuable export revenues, able to protect the firm's intellectual property, protected from competition and much more.
Monopoly defines as a business, usually is a large company or firm that provide good or services in the market. It is a market structure that involved only a single seller that is selling or producing a no close substitution of product and a large amount of buyers. Besides that, it has a high entry and exit barrier. There are some of the examples under monopoly market in Malaysia are Tenaga National Berhad (TNB), Telekom Malaysia (TM Berhad), Indah Water and more.
Characteristic of monopoly
Single seller and large buyers, no close substitution, restriction of entry of new firms, as a price maker and able to maintain super-normal profit are all the characteristics of monopoly.
Single seller and large buyers
There is a single seller or producer under monopoly market which selling no close substitution to a large amount of buyers. The single seller can be an individual or group partners as the only supplier to supply the goods and services. In fact, the market of monopoly is the place for monopoly firm to run their business. Therefore, there are no much different between every firm in the monopoly market.
No close substitution
The consumers cannot find any substitution for a product in monopoly market because the firm only sells a no close substitute's product. But if a consumer found another substitution, therefore the product is not exist in monopoly market. For example, TNB is the only industry that supplies electricity in Malaysia. But the consumers found solar energy as a substitution; hence, TNB cannot exist in monopoly market if there is a competition.
Restriction of entry of new firms
A high barrier of entry for a new firm is one of the characteristic. It wills not a free entry for a new firm because of the restricted based on high costs or other hinders such as legal restrictions. For example, when a new firm entry a monopoly business such as TNB, there could be a very high cost to entre because there is only one product are supplied. Besides that, copyright is formed to prevent others firm set up a similar business. That's why a monopoly is facing no competition in the market.
As a price maker
A monopolist is a 'price maker'. They set a sale price within the paradigms of the Monopoly Theorem and the buyers must accept. This is because there is only one product in the market and no substitution, so the buyers must consume even the price is high.
Maintain super-normal profits
Another characteristic of monopoly is it able to keep a super-normal profit in a long run. When Marginal Cost (MC) = Marginal Revenue (MR) is occur, the profits also be maximized. Basically, the level of the profits is related with the degree of competition
in the market which there is a zero for a pure monopoly. At profit maximization, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, super normal profits are possible (area PABC).
Conclusion of monopoly
Monopoly is talk about number of producer, type of product, price control and ease of entry. In general, it supplies us the essential product such as water, electricity, sewage service and more. Therefore, it is an important supply sources for us.
In the marketplace, there have many different buyers and sellers. Which means we have competition in the market and we are enables the price change due to the changes in supply and demand. Both of the supplier and consumers are able to affect the price of the goods. Furthermore, for almost all products are substitutes, consumer has choice on choosing cheaper or expensive product. In some industries, there are no substitution, no competition and consumers must consume even the product is expensive because the producers control the price. There are four types of competition in the market which are perfect competition, monopolistic competition, oligopoly, and monopoly.
Features of perfect competition
Perfect competition is characterized by many sellers that are selling similar products in the market but no one have enough market power to dictate the price of products because the price is decided by the market forces of supply and demand. For example, a consumer can choose either buy or not when a single firm decides to increase the price of a good. The firm will lose its market share and profit while the price increases. Besides that, there are also many buyers because the demand of an individual buyer is a little part of the total demands in the market therefore there must be many buyers to change and control the demand. Both of the buyers and sellers also have perfect knowledge about the market and pricing condition. Hence, buyer will not purchase with higher market price and sellers will not charge the price lower than market price.
Features of monopolistic competition
Monopolistic competition is a mixture of monopoly and perfect competition. It is a market that has a large amount of sellers selling the close substitution to each other. For example, the firm under monopolistic competition is the fast food burger company. There have many kind of this company but their recipe of the burger may different. Freedom of entry and exit and absence of interdependence are also the features of monopolistic competition. Since the size of firm is small and produce close substitution, therefore new firm can exit or enter the industry to run their business under their brand name. Then every firm under monopolistic competition is interdependence because they set price for the production policy based on their demand cost.
Features of oligopoly
In an oligopoly, there are only a few sellers control the market for example tobacco business. They control over the price like monopoly. Besides that, the firms under oligopoly market are taking a lot of advertising and promotional activities so they must aggressive to achieve a greater share in the market and to maximize sale. They also produce homogeneous product. After that, the firms which are competing for market share, they are interdependent as a result of market forces. For example, an economy needs 100 cars. Company A produces 50 cars and its competitor- Company B produces 50 cars. The prices of both brands are similar. Therefore, if either one of the company decrease the price of car, it will get a greater market share and it will force the other company to lower the price too. Hence, they are interdependent.
Features of monopoly
Monopoly is a market structure where there only one seller control the market and produce a no close substitution such as TNB. There is no free entry because of the restricted based on high costs or other hinders such as legal restriction. Governments always control the business under monopoly. They do not allow the other country start up the same business in the market. Copyright also formed to prevent others from entering the market. In additional, the monopolistic is a price maker and also is a profit maximizer because there is only one seller produces product in the market. They can set the price as high as well and get high profit.
Economics focuses on the pursuit of wealth in a market that full of competition that can force the producers and consumers become innovative. The efficiently use of resources in the competition of free market and giving in response to customer demand. Therefore the competitions in free market are very important to an economic.
Conclusion and recommendation
From this Microeconomics assignment, I have understands about the characteristic of microeconomics. It helps me to understand the actual economic phenomenon.
In task 1, Monopoly is a market that generates high profit because it is only have a single seller, as a price maker with a high market share and less of competition and so on. Therefore, there are many advantages to become a monopolist. I recommend that to become a monopolist must have perfect knowledge on their product too to extend their business to a wide field.
From task 2, the 4 types of competition also have their own features. Because of these competitions, the economy only can be control and stabilized. What if there are no any competitions in all the market, inflation will happen. It helps me to understand the working of the economy.