Question

2. List the characteristics of all the market models and their economic implications (e.g. price taker vs price setter demand curves; barriers to entry and long run profits for firms)?

Answer 1

1. Perfect competition

Characteristics :

-there are many sellers and buyers.

-there is free entry and exit.

-they produce homogeneous product.

- price takers.

-perfect information

Economic implication:

They are price taker because they produce homogeneous product. So, face horizontal demand curve. There is no barriers to entry. They earns zero economic profit in long run because of free entry and exit.

2. Monopoly :

Characteristics :

-Single seller

-there are barriers to entry

-no close substitute

-price maker

Implications :

Because monopoly is single seller, it's demand curve is equals to industry demand curve. So, it is downward sloping and thus they are price setters/makers.

There are barriers to entry and becouse of that monopolist can earn positive economic profit in long run.

3. Monopolistic competition.

Characteristics :

-there are many sellers and buyer.

-there are free entry and exit

-produce differentiate product.

-price makers.

Implications :

Because they produce differentiate product, they are price setters. There is free entry and exit and thus earns zero economic profit in long run.

4.Oligopoly

Characteristics:

-There are few firms.

-significant barriers to entry.

-produce homogeneous or differentiate product

-price makers.

-mutual interdependence

Implications :

Because there are fewer firms, they dominant industry and if collude they can act like monopoly. So, they are price setters.

There are barriers to entry and so they can earn positive economic profit in long run.