Question

1)List the two main characteristics of each industry structure: perfectly competitive market, monopolistic competition, monopoly competition? 2.For each of these market structures above state if there exist barriers to new firm entry.

Answer 1

Perfectly competitive market.

1) Large number of buyers and sellers.

There is the existence of large number of buyers in the market. The demand made by a single seller is only a small fraction of the entire demand of the industry. Likewise there is large number of sellers in the market. The supply made by a single seller is only a small fraction of the entire supply of the industry. Thus the individual seller or buyer cannot alter the market price by his own action. In other words the individual seller or buyer has no control over the market price.

2) Homogenous product.

Under perfect competition each firm in the industry sells homogenous product. Each unit sold in the market is identical in size, shape, colour, weight and in all other aspects. The products are perfect substitute. Thus buyers do not find any differences in the product sold by different firms in the industry. Because of the zero degree of product differentiation the firms have no control over the price.

Monopolistic competition.

1. Large number of buyers and sellers.

Under monopolistic competition there are large number of buyers and sellers. The size of each firm is small. Each firm has limited market share.

2. Product differentiation.

One of the distinct features of this market is product differentiation. The rival firms are selling a production which are close substitute but are not perfect substitute. The product of one firm is dissimilar from the rivals in respect of size, shape, colour, brand name, weight and material used. Since there is some sort of product differentiation each firm has monopoly over the product and at the same time since products are close substitutes and there are large number of firms each firm has to face competition from the rivals.

Monopoly.

1. One seller and large number of buyers.

Under monopoly there is only one seller for a product. The entire supply of the product is controlled by a single seller. But there is large number of buyers for the product.

2. No close substitute.

No close substitute available for the product produced by the monopolist. The absence of close substitute and the existence of singe seller in the market give full control over price and output by the monopolist.

2. Under perfect competition there is freedom of entry and exit. A new firm is free to enter into the industry and an existing firm is free to leave it. There is no barrier to the movement of firms in and out of the industry.

Under monopolistic competition the firms are free to enter and leave the industry but firms have no absolute freedom to enter into the industry. Products of some firms are legally patented. New firms cannot produce the identical patented product of the existing firms.

Under monopoly there is no freedom of entry of new firms into the industry. A monopoly firm may have patent right or control over the technique of production and resources.