Question

Explain and detail the functioning of the markets around the model of perfect competition, imperfect markets, model of monopolistic competition, oligopoly and monopoly models.

Answer 1

1.

Since the Oligopoly market, there are few large firms who control whole market.

In the oligopoly industry there are few large firms who supply the goods in the entire markets. Since there are few firms so these firms sometimes collude for maximizing joint profit. This is because the joint profit is always greater than individual firm profit.

Hence there is restriction on the output productions. Therefore there is control on the prices. It means high prices and lower output reduces consumer surplus.

Since price is greater than MC, therefore there is restriction of new firms, that's why there is higher prices.

Since output production is less than the optimal level, therefore there is efficiency loss.

The oligopoly firm engage in high advertisement for capturing more share of the markets. This leads to more costs and these costs burden falls on the consumers in the form of high price and therefore consumer surplus decreases.

There are many model under oligopoly

Bertrand model

Stackelberg model

Cournot model.

2.

Perfectly competitive markets.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price.

A perfectly competitive firm profit-maximizing condition is

P=MC

3.

A monopolistic firm is a maker and profit-maximizing condition is

MR=MC

A Monopolistically competitive firm

Since a monopolistic firm is that form of market in which there is large number of buyers and sellers and firm sells differentiated product based on quality, size, shape etc, therefore product is not homogeneous. Since firm is price maker but firm does not compete on the price but they compete in the market based on size, quantity quality etc.

4.

A monopoly firm is a single seller of the goods and this firm is price maker and not the price taker because it is only a single firm who supply the goods in the entire market.

The profit-maximizing condition is

MR=MC

2.

In the monopolistically competitive industry there are large number of buyers and sellers. There is free entry and exit and there is differentiation in product of many firms based on the size, color, quality and shape.

The price in this industry is greater than the price of the perfectly competitive firm.

Since in the long-run Monopolistic competitive firm profit-maximising condition are;

MR=MC