The Features Of Monopolistic Competition Economics Essay
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Published: Mon, 5 Dec 2016
The subject that I study is Microeconomics. I would define this subject as the individuals or the groups make the analysis of the decisions, the factors that affect the decisions and how the decisions affect the others. ‘Micro’ means ‘small’, microeconomics means the economists in this field study the basic, small-scale economic behaviors and decisions. Microeconomics examines the impact that the individuals, businesses and industries who made the economic choices which have on resource allocation and the supply and demand of goods and services in market economies. The supply and demand determine the prices of goods and services. Microeconomics studies how prices factor into economic decisions, and how the decisions affect the prices.
1.0 Introduction of monopoly
Monopolist has monopoly power to control the whole market. When a firm controls 25% or more of a particular market, monopoly power will exist for the purposes of regulation. If some scarce resources which a firm has, that means the firm has the exclusive ownership of the resources, only this firm can exploit the resources and it has monopoly power over the scarce resources. The patents over ideas or copyright over the designs, images or names of producers will giving them the exclusive rights to sell the products and services to the consumers.
1.1 Definition of monopoly
A monopoly is a single supplier or producer in a market. It can control the market by itself and control the prices and the total supply of the goods and services. Natural monopoly means the industry in which one company can most efficiently supply all needed products and services. For an example, electric company is natural monopoly because it supply the power that needed by the citizen in local area.
1.2 Characteristics of monopoly
The characteristic of monopoly is one seller and larger number of buyers. The monopolist controls the whole market by itself. No one can compete with the monopolist. All of the consumers need to buy the products from monopolist. The second characteristic is no substitute. There are no substitutes in the monopoly market. If the products of monopoly finish already, there is no other substitute product for the consumer to choose and buy. The third characteristic is restricting the new entry into the market. This means that the other firms have strong barriers to enter the market. The last characteristic is specific information. Monopolist has the specific information on it business because just its own owns the business in the whole market. A monopolist would be able to derive the greatest monopoly power with no substitute in the market. There are some disadvantages of monopoly to the consumer also. These are also the characteristics of the monopoly. Monopolies can restrict the output onto the market and restrict the choices for the consumers. It can charge a higher price for the products than in a more competitive market. It also can reduce the surplus of the consumer and the economic welfare.
1.3 Diagram of monopoly
Monopolies can maintain the super-normal profits in the long run with no close substitutes. Monopolies means that no substitute and no competition in a market so super-normal profit will derive by the monopolies. Profits are maximized when MC=MR as with all firms. The level of profit that earn by the firms depends on the degree of the competition in the market but for a pure monopoly is zero. At profit maximization, MC=MR and output is Q and P, price (AR) is above ATC at Q, super-normal profits are possible which can be seen in area PABC that shows in the below diagram.
A monopoly is a single supplier who controls the market by itself and the prices and the total supply of the goods and services. The characteristic of monopoly is one seller bigger than the buyers. The monopolist controls the whole market by itself. The second characteristic is no substitute. There are no substitute products in the monopoly market. The third characteristic is restricting the new entry into the market. The last characteristic is specific information. Monopolist has the unique information on the product.
Economists have figure out four degrees of competition in a private enterprise system which is perfect competition, monopolistic competition, oligopoly and monopoly because not all industries are equally competitive with others, even in a free enterprise system. Perfect competition, monopolistic competition, oligopoly and monopoly have different characteristic.
2.1 Features of perfect competition
Perfect competition is characterized by numerous small firms that produce the identical product, as a result, many substitutes. The producers in the perfectly competitive market are possess to the prices that determined by supply and demand and the market. No single firm can affect the market conditions and prices. It can said to be a price taker because it takes the price from whole industry. The producers produce the identical product from their competitors. There are many competitors in perfect competition. There are no barriers for the producers to entry into or exit out of the market. The firms are free to entry and exit the market. Local farmer is the example for the perfect competition. If a farmer decides to increase the selling price of a good, consumers can buy the good from the nearest competitor for the better price. It can cause the farmer who increasing the price to lose the profit and market share.
2.2 Features of monopolistic competition
Monopolistic competition means markets that characterized by many buyers and sellers trying to make their products look difference from other competitors. Large number of seller sell the similar product by using differentiating strategies, therefore no single firm can set the price of a product. The strategies of differentiation products include design, styling, advertising and brand names. Advertisement is a prominent example of the characteristic-non-price competition. The firm will spend a lot of money on advertisement and selling cost to win over the customer. The firms have freedom to enter into and exit out of the market. There also many competitors in this market but fewer than in pure competition. The sellers in the morning and night market are the example. They sell the same product but they try to differentiate the product from others so they can set the price high little bit for their product like sell the phone case. The seller can make the phone case look different to win the customer.
2.3 Features of oligopoly
Oligopoly means industry characterized by a handful of sellers with the power to influence the price of their products. An oligopoly exists when an industry has only a handful of sellers. The first characteristic of oligopoly is product branding. Every firm is selling the branded product in the market. Another characteristic is an oligopoly has strong barriers to entry. Many small industries possible to operate on the periphery of an oligopolistic market, but they are not large enough to affect the prices and output. The third characteristic is interdependent decision making. This means that the industries must take action when their rivals change in the prices and outputs. So the prices and the outputs of the industries are almost same with their rivals. There are a few of competitors also. The different branded products that sell in shopping complex are an example. When a firm decides to cut prices or discount to increase the sales of branded product in shopping complex, another firm which sell branded product in there also will do the same action to protect the sales. So the prices of comparable product are similar.
2.4 Features of monopoly
Monopoly means that the market in which there is only a producer and can set the prices of its products. The characteristic of monopoly is it is a single seller. The monopolist is the only source of supply for the goods or services with no close substitute. Free entry of new industries in this market arrangement is prohibited, this characteristic calls restricted entry. Government license, patents, high start-up cost and so on are the barriers for the entry of new industries. Full control over price is the one of characteristics. Monopolist is a price maker, it decides the prices and all the buyers have to accept it. Another characteristic is lack of competition in the market. The market is designed to a monopoly, so the competitors cannot and not large enough to compete with the monopolist. For example, the electric company is monopoly because it is the only one to supply the electricity, none of the firm can supply the electricity.
2.5 Differentiation of four degrees of competition
Perfect competition likes agriculture, the sellers sell the same products and cannot dictate the price in the market. Monopolistic competition likes morning and night market, the sellers sell the same products by differentiate the products from the competitors to win over the consumer. Oligopoly likes shopping complex, the sellers sell the branded product and can influence the prices of the product of other industries. Monopoly is the only producer in the whole market, no one can compete them and there is no close substitute in the market.
In short, perfect competition is characterized by numerous small firms that produce the identical product like agriculture. Monopolistic competition means markets that characterized by many buyers and sellers trying to make their products look difference from other competitors like the morning and night market. Oligopoly means industry characterized by a handful of sellers with the power to influence the prices of their products like the industries who sell the branded products in shopping complex. Lastly, monopoly means that the market in which there is only a producer and can set the prices of its products. There is no close substitute in this market.
3.0 Conclusion and Recommendation
A monopoly is a single supplier in the market. The characteristics of monopoly are one seller bigger than the buyers, no substitute, restricting the new entry into the market and specific information. Perfect competition means the producers produce the identical product and a lot of competitors. Monopolistic competition means the buyers and sellers trying to make their products look difference from other competitors. Oligopoly means a handful of sellers with the power to influence the prices of their products like the industries who sell the branded products in shopping complex. Lastly, monopoly means that the market in which there is only a producer and can set the prices of its products.
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