Question

Q1. Firms in oligopoly must constantly think in terms of how other firms in the industry will react to whatever they do. Why do they have to do this? Why is it that firms in perfect competition and in monopoly don’t have to worry about how other firms will react?

Q2. Governments are frequently tempted to introduce price ceilings in markets. Use an example to explain why this is not such a good idea, at least when markets are competitive. Give some ideas as to what the government could do instead in order to help consumers in these markets.

Q3. If perfectly competitive firms are price takers, and monopolistic, monopolistic competitive, and oligopolistic firms are price searchers, then it follows that three times as many firms in the real world are price searchers than are price takers. Do you agree or disagree? Explain your answer.

Q4. Critically analyze the following statement with views of your own:

Answer 1

1.Oligopoly market structure consists of few firms selling slightly differentiated products, thus there is a constant competition between the firms to capture the maximum market share. In case if perfect competition there are more number of firms operating in the market such that firms earn normal or zero profit in the long run as a result perfect competition is the socially optimal form of market structure.
In perfect competition firms do not need to worry about market share because they are selling identical products so consumer is indifferent between between product of individual firms. In case of monopoly market one firm holds the entire markrt market share since there is no competition the furms do not need to worry about competition or other firm's reaction

2. Governments are tempted to introduce price ceiling in the market in order to regulate markets where prices tend to shoot up. But though in theory it might seem like a useful tool to regulate markets in practice it might not be such a good idea if the markets are competitive in nature in fact it would lead to a faux shortage in the market as demand would be higher than supply at price ceiling level of price and producers would tend to hoard goods to sell in black market thus creating even further deficit in the market.
Price ceilings create more problems than offer solution in case of competitive markets.

3. Perfect competition is an ideal scenario which is very rarely observed in the real world, the most common market forms are monopolistic competition and oligopolistic competition so it wouldn't be correct to say three times as many firms in the real world are price searchers than are price takers since rarely are firms price takers in the real world and the composition of markets may vary depending on various external factors and more often than not firms tend to be price searchers where forces of demand and supply determine the prices along with other constraints.