Question

3) What are the primary differences between a competitive market, a monopolistic market, an oligopolistic market, and monopolistic competition? Graphically illustrate for competition, monopoly, and monopolistic competition, (we did not do an oligopoly graph) and explain what concepts we are trying to model graphically. Which model would best represent the following markets, and why?

            a) Chinese Restaraunts

            b) OPEC

            c) Bananas

            d) Power Company

Answer 1

In a competitive market, firms charge a price equal to marginal cost. Their economic profits are zero. Those firms that cannot suvive this wll exit.

A monopolist produces quantity where marginal revenue equals marginal cost. Then he plugs in this quantity into his demand function and charges a high price. He thus makes huge profit.

In Monopolistic competition, the firm sets quantity and price just ike a monopolist.

An oligopolist would like to set his price like a monopolist. But if the other oligopoly firms charge a lower price, he will face a loss. His prices change less frequently compared to other market forms, and all oligopolists move in tandem and charge similar price.

Graphs: a) Monopoly

  

Quanitty is where MR = MC. Verically, quantity is equated with demand curve and price is fixed. The rectangle above MC curve upto price line is the monopolist's profit.

b) perfect competition: (i) industry:

  

Both quantity and price are fixed where demand and supply curves meet.

perfect competition: (ii) firm:

The firm's price = AR = MR. Quantity is fixed where MC = MR. In the graph, the firm is making zero economic profit.

c) monopolistic competition:

  

The cost curves are just like monopoly. the difference between price (P) and cost(C) is the profit per unit.

a) Chinese Restaraunts - monopolistic competition (differentiated servicees)

            b) OPEC - oligopoly (very few producers, forming cartel)

            c) Bananas - perfect competition (known by generic name; almost identical product)

            d) Power Company - monopoly (normally only one provider)