Question

answer approximately 1 to 3 paragraphs to each question

1.  Imperfect competition can be extreme (a monopoly) or less extreme (oligopoly). What is the difference in the effects between these "degrees" of imperfect competition? Is less competition better or worse for society? How do you or how can you tell?

2. What is the relationship between the supply & demand curves and the MB & MC curves we learned about in Module 1 (Lecture 4)? What does this mean for the producer and consumer surplus? What does the total surplus in a market represent, given this understanding of the supply and demand curves?

Answer 1

The degrees of competition determine how firms take their decisions and how consumers react to those decisions of the firms.

Extreme case of Imperfect Competition or Monopoly: This is a market structure with a single seller of a product who is also the only producer of the product having no close substitutes. This market structure is also characterised by many buyers of the product. SInce the competition is extremely imperfect due to the presence of single seller and many buyers, buyers become the pice takers whereas the sellers are the price makers. Unlike the seller a single buyer's market share is very small. Thus, no single buyer can influence the market. If the product demands extremely high price there is no option of switching to another seller or consuming a substitute since that is not available. Monopoly market is also characterised a strict barriers to enter market. This means, due to various reasons like patent rights, copy rights, government laws, prevalence of natural monopolies enjoying economies of scale and so on, no other seller can enter the market. Thus, the single seller can freely resort to price discimination to raise profits.

Lesser Degree of Imperfect Competition like Oligopoly: In this type of market structure there are few firms selling the particular product(whose market it represents), which makes the competition among the few firms very intense. The intense competition causes the firms to take into account the decisions of rival firms. Thus actions of the rivals are interdependent. But, number of sellers make it important for them to incur selling costs e.g advertisements.There exists barriers to enter the oligopoly market due to access to important inputs, economies of scale, huge cost advantage and so on, but barriers are less stringent than Monopoly market.

Competition can be among the buyers to acquire the product and sellers to sell the product. So as we move from monopoly to oligopoly the competition among sellers increase which is better from a consumer point of view. Firms are always looking to cut their prices to acquire a greater market share, which makes the consumers get the product at a lower price.

On the other hand when in monopoly market there is no competition among sellers and they charge according to their own will which is desirable for the sellers from a profit point of view.

Competition among buyers to get the good implies scarcity or supply falling short of demnd which raises prices. Due to its inflationary implications competition among buyers hurts the buyers.

2. The demand and supply curves operate independently, but the quantity of the good demanded and supplied in the market are related. Demand curve is a negatively sloping curve which depicts the fall in quantity of goods demanded with increase in price other things remaing equal. Supply curve is a positively sloping curve which depicts the rise is quantity of goods offered for sale with increase in price other things remaing equal. The point where the curves meet is the equilibrium point which gives the quantity of the good bought and sold in the market. As any other parameter other than price affects demand or supply to alter it, consequently the equilibrium value of the other changes.

Marginal benefit is the additional benefit from consumption of additional unit of a good whereas Marginal Cost is the extra cost from production of an additional unit of a good.

Consumer Surplus is the difference between the maximum amount consumer is willing to pay for a good and the amount consumer pays for a good. Producer Surplus refers to the difference between the amount the seller is paid minus the seller's cost of providing it. Thus, as the marginal benefit falls for additional units of consumption of the good,consumers' willingness to pay falls and hence the consumer surplus falls. As the marginal cost rises for additional units of production of the good, sellers' cost of providing the good rises and hence the producer surplus falls.

Thus, total surplus is the sum of consumer and producer surplus. It is represented by the area between supply and demand curves up to the equilibrium quantity. In the market, total surplus is basically the differnce between the value of the commodity to the buyers and cost to the sellers.