The Barrier Of Entry And Exit Of Firm
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Published: Mon, 24 Apr 2017
Microeconomic is a behavior of individual economic unit. Microeconomics studies income distribution and resource allocation as the employee affect by the free working of the price system and specific government policies. Microeconomic study how a start-up business follow the consumer needs and choice, and the competition of market and other financial or economic formulas to determine the competitively successful and unsuccessful price of the product good and services. Microeconomic also study supply and demand how does it effect on consumer spend and business decision-making. In the theory of product price will involves the relative prices of goods and services depend upon the force of demand and supply. The firm will produces the supply for the consumer by their demand need. Microeconomic also studies how does determine wages, rents, interest, and profits affect from the pricing of factor services in the market. The determination of factor price is analyzed through the demand and supply of the factor of production. For another area in microeconomic is to involve efficiency in production, efficiency in distribution and overall efficiency in the economic efficiency.
Monopoly is a market structure in which there is a single seller and large customer or buyers. It sell product have a high entry and exit barrier and have no close substitution. Examples of products in monopoly market are such as electricity, water, cable television, local telephone service. That all examples in Malaysia who we only can go is Telekom Malaysia (TM Berhad). Telekom Malaysia is a monopoly market in our country. If we have various options to choose from when we need to use telecommunication services, then the industry is not a monopoly market again and it will change to other type market.
1.2 Characteristics of Monopoly
One seller and large number of buyers:
Monopoly being that when there is only one seller of a product. Monopoly firm is the firm only firm in the world of business selling product with no close substitution. Monopoly market is an area where the monopoly firm to run it business. So, in basically it is no any difference between firms with it industry in the monopoly as there is only one seller. The monopolist is a price maker for one seller and producer and it has the power of market to control over the price of the product.
No close substitution:
Monopoly firm will sell the product without any close substitute. That means all the consumer and buyers could not find any more substitute for the product. For the example, if the public local usefulness of electricity which has no close substitutes. But the buyers can find anyone substitutes for the electricity like solar energy. Then the product will is not being monopoly already. Other words, the monopoly cannot exists that mean there is a competition or has any substitute product.
Restriction of entry of new firms:
In the monopoly market, if need to entry a new firms that will get a strict barriers to entry. Barriers to entry are natural or legal restrictions that restrict the entry of new firms into the business world. A monopolist faces no any competition, that all because the barriers of entry. All the type of barriers will be discuss in detail on the next section.
Advertising will depends on the product sold in the monopoly market. If the products are luxury goods like an imported car then the monopoly need do some advertisement to inform the consumers on the goods. Local public utilities such as water, electricity and home phone services that all no need to do the advertisement by the monopolist because the consumers know from where to obtain the product.
1.3 Diagram of Monopoly
A monopoly market will therefore mean that the market supply curve is identical to the single firm’s supply curve and that the market demand curve is identical to the firm’s Average Revenue (AR) curve.
We must confirm again identify where profit maximization is achieve where the line MC=MR. This MC=MR condition is sure and require in the firm by theory. If marginal revenue is greater than marginal cost, the firm will increase output since any increase in output will increase revenue more than increase the cost, therefore increasing profit. Converse, if marginal revenue is lower than marginal cost, will reduce output and will help the firm reduce its losses. In the short-term, the monopolist will enjoy normal profits when it is produce at output quantities where MC=MR and that its AC=AR.
2.0 Introduction Market Structure
Difference markets will make the difference decisions on the determination of quantities and the product prices. Basically we understand the term of market is a place where to let the buyer and seller meet and transactions of goods and services. Each market structure has a unique set of characteristics such as perfect competition, monopoly, oligopoly, and monopolistic. Perfect competition in the market is has many sellers and monopoly just a single seller in the market structure which are polar extremes of each other. Examples of goods in perfect competition are vegetables, fruits, rice, wheat, primary commodities, gold, silver and other. And the example of monopoly is Telekom Malaysia (TM Berhad). An oligopoly market share similar characteristics of a monopoly when some firm work together to function as one seller. For the example in this market are cigarettes, automobiles, electrical equipment and cement. Monopolistic market is characterized by some firm or sellers competing with one another through non-price competition. For the examples are shoes, clothes, books, watches, toothpastes, soaps, ice-cream, chocolates and other.
2.1 Number of Sellers
Perfect competition has a large number of buyers and sellers in the market. An important feature of prefect competition is the existence of large of buyers and sellers. The quantity a single seller sells in a market is so small compare to the overall industry. For the example, in the poultry business, there are thousands of chicken producers in Malaysia. Every firm produces only a small fraction if the total poultry business.
Monopoly only has one seller but has a large number of buyers. Monopoly exists when there is only one seller of a product. Monopoly market is the place where the monopoly firm operates. So, basically there is no difference between a firm and industry in monopoly as there is only one seller.
Under oligopoly, the number of firms is small but the size is large. The market share of each firm is large enough to dominate the market. Some firms will control the overall industry under oligopoly. Example for this market are cigarettes, automobiles, electrical equipment and cement.
Monopolistic competition is same with the perfect competition; there are a large number of sellers and buyers in the market. For example, in toothpaste business, the price for a 250 ml toothpaste range among brands such as Colgate, Darlie, Fresh White and other firms as well.
2.2 Product differentiation
One of the conditions in the perfect competition market is that the firm must sell standardized or homogenous products. The buyers do not differentiate the products of one seller to another seller. Example, the buyers cannot differentiate the chicken sold in Firm A and Firm B. Because the firm cannot charge different price for the same product in market.
Monopoly firm would sell a product which has no close substitute. It means consumers or buyers could not find any substitute for the product. Example, electricity supply from local public utility which has no close substitutes. If the buyers find any substitutes for the electricity like solar energy then that product is no more in monopoly.
The product sell under oligopoly can be either a homogeneous or differentiate product. For the example, cement or electrical appliances produce by one firm are identical to another firm. It is same meaning like the old sell in Malaysia is identical to the oil sell by Middle East country such as Kuwait, Iran and Saudi Arabia.
In monopolistic competition, the firm will produce bests which are different from its competitor. Everyone seller would use various methods to differentiate their product from other sellers to fascinate buyers or consumers. Example, if eggs are sell in open shelf then the egg are in perfect competition market. But if the same product and package in a box and label the name then this product is in monopolistic competition.
2.3 Barrier of entry and exit of firm
Under perfect competition, there is no restraint to entry of new firms to the business or exit of the firms from the business. A firm can easily enter and exits the perfect competition any time. Example, any firm or company who wish to open a chicken farm can run the business if he or she has the necessary factors of production.
In a monopoly market, there are stringent barriers to the entry of new company. Barriers to entry are natural or legal restrictions that restrict the entry of new company into the business. A monopolist faces no competition because of barriers of entry. Types of barriers will be discussed in detail in the next section.
Under oligopolistic market, there are various barriers to entry. Same with the monopoly market, the oligopoly firms will limit new entrants into the market. The types of barriers to entry are control of certain resources, ownership of patent and copyright, exclusive financial requirements and other legal barriers. Furthermore, large company will take drastic action to prevent the entry of new company by flooding the market. Those all large company will produce the product at excess production containment which would drive the price down. Once the new companies are out of the market, these large firms reduce the production capacity and increase the price.
Under monopolistic competition is same like perfect competition but monopolistic competition is not easy than perfect competition to entry and exit because of the existence of product differentiation. All new company would enter the business must find some differentiation with the existing brands. For example, if ‘Maju Soap’ want to enter into the bathing-soap business. This company must find some different in term of quality, smell, shape or labeling in order to be in monopolistic competition.
2.4 Ability to set price
In the perfect competition market, the role of non-price competition is insignificant since many sellers sell the products at a fixed price and furthermore, the products are identical. In other terms, non-price competition also can be referred as selling cost. Selling cost are the expenditures spent to increase the sale of a product or increase the demand for that product. In perfect competition market, firms have no control over the price and their goods are identical so there is no selling cost. For example, we do not see any ad in television about chicken or vegetables especially without any brand.
Advertising in monopoly market depends on the products sell. If the products are luxury goods such as imported car, then the monopoly needs some advertisement to inform the consumers on the goods. Local public utilities such as water, electricity and home phone service do not need advertisement by the monopolist because the consumers know from where to obtain the product.
Company in an oligopolistic market always considers the reaction of their rivals when set the price, sales target, advertising budgets and other business policies. This is one of the most important characteristics of an oligopoly company which differs from other market structure. Because the number of firms is small, changes in price or output by one firm can have direct effect on another firm. For the example, Honda change its design and increase the price, its rivals Toyota and Nissan will also respond by change their design and price.
In monopolistic competition market its world be stiff competition among the firms for their products and not for the price of the product. Monopolistic competition firms do not compete use the price as the product in market has many substitutes. Type of non-price competition practices in monopolistic competition market is advertisements, promotion, discounts, after-sale service, free gifts and others.
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