Question

Define the following Economics terms.

1. Perfect Competition

2. Zero Economic Profit

3. Monopoly

4. Monopolistic Competition

5. Oligopoly

6. Cartel

7: Natural Monopoly

8. Price Discrimination

9. Game Theory

10. Corporation

Answer 1

1.

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. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

MR and Price are same in the perfectly competitive firm

2.

The long-run profit-maximizing condition is

P=LRMC=Minimum of ATC

Since in the long-run firms earns only normal profit or zero economic profit. So when any firm in the short-run is not able to earn normal profit, leaves the industry. So it means number of firms in the long-run also varies.

Normal profit arises when total revenue and total cost are equal.

Normal profit means zero economic profit.

3.

A monopoly firm is a single seller because there is barriers to entry. In a pure monopoly industry, there is a single firm. The barriers to entry are those factors which lead to the restriction of entry by the new firms. These are patent laws that restrict entry of new firms. License and copyrights are also an example of barriers to entry.

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

MR=MC

4.

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

In short-run a monopolistic competitive firm profit-maximizing condition is

MR=MC

5.

Since in the oligopoly there are few firms who control whole markets, therefore in this market structure firms are dependent on the action of their rival firms.

There are many kinds of oligopoly firms

Cournot duopoly, Bertrand Duopoly and Stackelberg Duopoly, cartel. The aim of these kind of oligopoly is to maximize their profit.

6.

In case of cartel, few large oligopolist firms comes together and reduce competition for maximizing joint profit. Hence they are able to charge higher prices by controlling quantity.

7.

An industry is said to be natural monopoly when a single firm is able to supply a good or services to the whole market at minimum cost compare to what two or more firms can do it jointly. It means the natural monopolist firm enjoy the economies of scale compare to other firms. Hence there is strong barriers to entry in the industry.