Question

Explain the long run economic profit earned by each of the four market models. Explain how the concept of economic profit might help explain the rationale for the government’s granting of monopolies to those firms that protect their product with a patent. Please use your own words do not copy and paste a texbook solution.

Answer 1

There are four market models: perfect competition, monopolistic competition, oligopoly and monopoly.

Perfect Competition – This market model is characterized by no competitions at all. According to Open Textbook Library, one assumption for this type of market is that the buyers and sellers will accept the market price given (2012). For example, when a consumer goes to the store they are considered price takers. As a buyer, we take the price given to us. With this type of market, there is the assumption that there is an ease of entry and exit for the market.In the long run, there would be no economic profits that would be earned. Economic profits in a system of perfectly competitive markets will, in the long run, be driven to zero in all industries because of either the role of entry or the role of exit in the market.

Monopolistic Competition– This type of market is stuck somewhere between perfect and monopoly. The assumptions for this type of market would be the same if it were a monopoly or a perfect competition market. In a monopolistic competition, there are many sellers. Entry and exit are fairly easy (Open Textbook Library, 2012). Restaurants would be an example of a monopolistic competition market model. In the long run, a firm under this market model will only make normal economic profits in the long run (Lipsey, &Harbury, 2004). This is because of inefficiency as well as a large number of sellers with different products.

Oligopoly – This can be deemed by completion among the few. Some assumptions for this market model are: few sellers and many buyers, firms are producing products that are different as well as there are barriers to entry (Arnold, 2008). This type of market can earn profits in the long run. According to Wessels, high barriers to entry prevent other firms from entering the market to attain profits (1997). An example of an oligopoly would be the automobile industry, cable television, and even the airline industry.

Monopoly – In a monopoly there is only one seller, there are no close substitutes and the barriers to entry are extremely high. FPL would be an example of a monopoly. Due to the barriers of entry being extremely high in the long run a monopolist company will see super abnormal profits.

            Economic profits are a way for firms to determine if it is beneficial to enter the market. If there are no economic profits then a company may exit the market. This goes for a monopoly as well. Governments may consider granting a monopoly a patent as a way to protect their product from any competition to in order from them to maintain a positive economic profit. Patents allow for a certain product to not be used for exploitation. Patents to allow for innovations to prevent the entry from external firms.