Question

plese plz answer the all question 2,3

Q2. Describe the features of Perfect Competition and how efficiency is achieved under Perfect competition.

Q3. Explain Product differentiation strategy under Monopolistic competition and how price and output is determined in a long run under Monopolistic Competition.

Answer 1

Q1)

Features of Perfect Competition

An essential aspect of perfect competition is the absence of any monopolistic element. These are the three essential features of perfect competition:

1. The number of buyers and sellers in the market is very large. These buyers and sellers compete among themselves. Due to the large number, no buyer or seller influences the demand or supply in the market.

2. The commodity sold or bought is homogeneous. In other words, goods produced by different firms are identical in nature.

3. Firms can enter or exit the market freely.

     Apart from these essential features, there are some more conditions attached to the perfect competition.

     Additional Features of Perfect Competition

a. Buyers and Sellers have a perfect knowledge of: the quantities of stock of goods in the market, the conditions of the market and prices at which transactions of sale or purchase are happening.

b. There are facilities that help the movement of goods from one center to another.

c. Buyers have no preference between different sellers.

d. Also, buyers have no preference between different units of the commodity offered for sale.

e. Sellers have no preference between different buyers.

f. At any given point in time, the goods are bought or sold at a uniform price. In other words, all firms must accept the price determined by the market forces to total demand and supply.

When a market operates under the condition of perfect competition, buyers and sellers have perfect knowledge and perfect mobility. Therefore, if a seller tries to raise the price above that charged by others, he loses customers. The stock market is a great example of perfect competition.

In perfect competition, market prices reflect complete mobility of resources and freedom of entry and exit, full access to information by all participants, homogeneous products, and the fact that no one buyer or seller, or group of buyers or sellers, has any advantage over another.

Perfect competition can be used as a yardstick to compare with other market structures because it displays high levels of economic efficiency.

Allocative efficiency:

• In both the short and long run we find that price is equal to marginal cost (P=MC) and thus allocative efficiency is achieved.
• At the ruling price, consumer and producer surplus are maximised.
• No one can be made better off without making some other agent at least as worse off i.e. we achieve a Pareto optimum allocation of resources.

Productive efficiency:

• Productive efficiency occurs when the equilibrium output is supplied at minimum average cost.
• This is attained in the long run for a competitive market.
• Firms with high unit costs may not be able to justify remaining in the industry as the market price is driven down by the forces of competition

Q2)

Monopolistic competition is a market structure where:

There are many competing producers in an industry,

Each producer sells a differentiated product, and

There is free entry into and exit from the industry in the long run.

Examples of monopolistically competitive industries might include fast food, gas stations, coffee shops.

There are several ways in which companies differentiate their product:

Differentiation by style of type: Clothing stores; different types of cars; books; etc. As long p p ,p as people differ in their tastes, producers will find it profitable to produce a range of varieties.

Differentiation by location: Dry cleaners, gas stations

Differentiation by quality: Ordinary and gourmet chocolate, fancy and other types of restaurants.

Sellers of differentiated products have some market power.

Price-output determination under Monopolistic Competition: Equilibrium of a firm

In monopolistic competition, since the product is differentiated between firms, each firm does not have a perfectly elastic demand for its products. In such a market, all firms determine the price of their own products. Therefore, it faces a downward sloping demand curve. Overall, we can say that the elasticity of demand increases as the differentiation between products decreases.

Fig. 1 above depicts a firm facing a downward sloping, but flat demand curve. It also has a U-shaped short-run cost curve.

Conditions for the Equilibrium of an individual firm

The conditions for price-output determination and equilibrium of an individual firm are as follows:

1. MC = MR

2. The MC curve cuts the MR curve from below.

In Fig. 1, we can see that the MC curve cuts the MR curve at point E. At this point,

· Equilibrium price = OP and

· Equilibrium output = OQ

Now, since the per unit cost is BQ, we have

· Per unit super-normal profit (price-cost) = AB or PC.

· Total super-normal profit = APCB

The following figure depicts a firm earning losses in the short-run.

From Fig. 2, we can see that the per unit cost is higher than the price of the firm. Therefore,

· AQ > OP (or BQ)

· Loss per unit = AQ – BQ = AB

· Total losses = ACPB

Long-run equilibrium

If firms in a monopolistic competition earn super-normal profits in the short-run, then new firms will have an incentive to enter the industry.

As these firms enter, the profits per firm decrease as the total demand gets shared between a larger number of firms. This continues until all firms earn only normal profits. Therefore, in the long-run, firms, in such a market, earn only normal profits.

As we can see in Fig. 3 above, the average revenue (AR) curve touches the average cost (ATC) curve at point X. This corresponds to quantity Q1 and price P1. Now, at equilibrium (MC = MR), all super-normal profits are zero since the average revenue = average costs. Therefore, all firms earn zero super-normal profits or earn only normal profits.

It is important to note that in the long-run, a firm is in an equilibrium position having excess capacity. In simple words, it produces a lower quantity than its full capacity. From Fig. 3 above, we can see that the firm can increase its output from Q1 to Q2 and reduce average costs. However, it does not do so because it reduces the average revenue more than the average costs. Hence, we can conclude that in monopolistic competition, firms do not operate optimally. There always exists an excess capacity of production with each firm.

In case of losses in the short-run, the firms making a loss will exit from the market. This continues until the remaining firms make normal profits only.