Question

1: Provide your own real examples of perfect competitive and monopoly markets, and explain how these firms are price takers and price makers.

2: How much profit monopoly firms make in the short run and long run?

3: Can a monopoly make a loss in the short run and long run?

Answer 1

1. PERFECTLY COMPETITIVE MARKET : A MARKET WITH LARGE NUMBER OF BUYERS AND SELLERS IS CALLED PERFECTLY COMPETITIVE MARKET. THE MARKET HAS FREE ENTRY AND EXIT.
EXAMPLE : A MARKET OF CLOTHS CONTAINING VARIOUS SHOPS IS A COMPETITIVE MARKET. IN SUCH A MARKET EASYLY A NEW SHOP CAN OPEN UP AND ALSO AN EXIXSTING SHOP MAY CLOSE DOWN. MOREOVER IN THIS TYPE OF MARKET IF ONE SELLER CHARGES HIGHER PRICE, CONSUMERS MAY SHIFT TO THE SELLER WHO IS SELLING THE SAME PRODUCT AT A LESSER PRICE. THUS THE PRICE IN A PERFECTLY COMPETITIVE MARKET IS PREDETERMINED AND DECISION OF SINGLE SELLER OR BUYER CANN'T INFLUENCE THAT.

MONOPOLY : THE MARKET THAT CONTAINS SINGLE SELLER AND LARGE NUMBER OF BUYERS IS CALLED MONOPOLY MARKET. IN SUCH A MARKET ENTRY IS CLOSED AND IF THE SINGLE SELLER CLOSES DOWN THE ENTIRE MARKET WILL DISOLVE.
EXAMPLE: INDIAN RAILWAYS CAN BE CONSIDERED AS A MONOPOLY MARKET. IN IT ONLY GOVERNMENT IS SELLING THE RAILWAY FACILITIES AND NO OTHER COMPETITOR IS PRESENT THERE. THUS IT MAY CHARGE ANY PRICE FOR THE SERVICE AND CONSUMERS ARE BOUND TO PAY THAT OR GO WITHOUT THE COMMODITY. THUS MONOPOLY SELLERS ARE PRICE MAKERS.

2.IN THE SHORT RUN MONOPOLY SELLER CAN MAKE PROFIT OVER AND ABOVE THE REVENUES. THIS IS OFTEN CONSIDERED AS SUPERNORMAL PROFIT. THE PROFIT EXPRESSION ABOUT WHICH WE ARE USED TO IS ACTUALLY SUPERNORMAL PROFIT(i.e. PROFIT = TR - TC). IN THE SHORT RUN FIRMS EARN SUPERNORMAL PROFIT AND NORMAL PROFIT. IN SR TR > TC OR TR = TC. THE EXCESS REVENUE IS FURTHER INVESTED AND THE FIRM IS EXPANDED UNTIL THE EXCESS REVENUE IS EXHAUSTED. THUS IN THE SR FIRMS MOSTLY EARN SUPERNORMAL PROFIT. IN THE LONG RUN THEY EARN NORMAL PROFIT WHERE TR = TC AND TOTAL REVENUE GETS EXHAUSTED AND FIRMS EARN JUST NORMAL THE REVENUE. THUS IN LONG RUN FIRMS EARN ONLY NORMAL PROFITS. IF TR < TC THEN FIRM FACES LOSS AND IT CLOSES DOWN.

3. YEA MONOPOLY CAN MAKE LOSS IN SHORT RUN AND IN LONG RUN OF TR < TC. IN THAT CASE COSTS WILL BE GREATER THA REVENUE AND NO MINIMUM REVENUE IS LEFT FOR FIRMS.