Question

There are four market models: perfect competition, monopolistic competition, oligopoly and monopoly. Briefly discuss the assumptions of each of these four models and give examples of each. Explain the long run economic profit earned by each of the four. 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 answer in paragraph, no bullet points or numerical and I will rate.

Thank you in advance!

Answer 1

1. Perfect competition market:

Perfect competition is a type of market under which it is assumed that there are a large number of buyers and sellers in the market and product is homogeneous along with its price, there is perfect knowledge prevailing in the market about the product, and there is freedom of entry and exit to the firm.

Do it is an imaginary market and can't be seen in reality, agriculture markets can be taken as an example of perfect competition market.

In the long run, a firm can not earn an economic profit. It can earn only normal profit as an implication of free exit and entry.

2. Monopolistic competition:

it is a form of the market under which it is assumed that there are many buyers and many sellers of the product and there is heterogeneity in the product. Product differentiation is practiced in the market.

Restaurants, pubs and hotels can be taken as examples of monopolistic competition.

In the long run, the firm earns supernormal for economic profits.

3. Oligopoly market:

it is a type of market under which it is assumed that there are small numbers of sellers or producers in the market which are very small in number. There are entry barriers in the market because of patents and trademarks. Firms are interdependent on each other for the formulation of their strategies and policies.

The automobile manufacturing industry is an example of an oligopoly market.

4. Monopoly market:

A monopoly market is a type of market under which it is assumed that there is only one seller and there are a large number of buyers and there are restrictions in the entry of competition.

companies like Microsoft and windows can be considered as an example of a monopoly market.

B. Government grants monopolies to some forms that protect a product with patents so that they get economies of scale and their cost of production decreases. As a result, they provide products to customers at a reasonable price.

Moreover, by granting monopolies, the government allows firms to earn an economic profit so that they can invest that money in innovation and provide innovative, better and improved products to its customers.