...Journal of Management and Social Sciences Vol. 3, No. 1, (Spring 2007) 11-21 Applicability of the Theories of Monopoly and Perfect Competition -Some Implications Ravinder Rena * College of Arts and Social Sciences Eritrea Institute of Technology Gobind M. Herani * Indus Institute of Higher Education (IIHE) ABSTRACT This paper addresses the concern that monopolies arise naturally out of the free market. An attempt is made to compare and contrast two theories of monopoly economic and political monopoly that this is not true. This paper further demonstrates that the two theories of monopoly have their separate roots in two opposite theories of competition: perfect competition and competition as rivalry. Hence the paper discusses only one of these theories of competition accurately describes the nature of competition in an economy. Besides, the paper also delves the two theories of competition and monopolies are derived from collectivist and individualist political philosophy. It illustrates how perfect competition and economic monopoly have undermined economists' understanding of the actual nature of both competition and monopoly. After investigating these theories, an attempt to made to apply them to show how one can come to very different conclusions about when monopoly power does and does not exist. Keywords : Monopoly, Perfect Competition, firm, industry, government, egalitarianism, etc. 1. INTRODUCTION It is often claimed that a free market leads to large firms gaining...
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...SUMMARY OF PERFECT COMPETITION There are high requirements in order for perfect competition to exist. They are: 1. Many buyers and many sellers. Why? 2. Free entry (and exit). Why? 3. Perfect knowledge about prices and quantities for those in that market. Why? 4. Homogeneous product. Why? Who determines the price in a perfectly competitive market? -The market does. How? The demand and supply determine what the market price and quantity are. How large is the market? How large are the firms in it? -The market can be very large. However since there are many firms, each firm is rather small. They are small enough so that no single firm can affect the price; they must accept the market price. You mean to say that if I am the owner of a competitive firm, I cannot change prices? Who can tell me what to do, if I am the boss! -You will accept the market price. This is when you learn about the power of market forces. One option: You could lower the price and make less profit. Why lower the price, if you can sell your product at the market price. Second option: if you raise the price, your clients will go elsewhere since there are many competitors nearby who charge the market price. Therefore, you will not lower the price nor raise it; you will accept the market price. Perfect competition will keep prices reasonable and provide the markets with many choices of goods. When prices are reasonable, it means that more people can afford...
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...given way to other identical or similar products for which there is now a strong consumer demand, and a price to pay. Thus, the nature of demand changes constantly for goods and services c. Perceptions in the marketplace. A positive price simply describes how much something costs whereas a normative price describes what something ‘should cost’ based on an individual’s or a group’s opinion. Usually there are consumer expectations that help guide the normative price. For example, how many times have you heard that, ‘my water bill is too high!” This interaction between positive price and normative price is an ongoing phenomenon and of particular interest to marketers who attempt to create and sustain customer satisfaction. d. Competition and Competitors’ pricing strategies Third, if the firm functions in a market where there are many competitors offering similar products, the firm may not have a choice about what level price to seek. thus, we first assess buyers’ perception of how much they would expect to pay for a product or service based on the utility (or usefulness) they would expect to derive from product or service and combine these individual utility functions to create a demand curve for the product in question. The % of a consumer’s income allocated to spending on the good – goods and services that take up a high proportion of a household’s...
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...Professor Scholz Economics 101, Problem Set #7 Costs, Adding Demand Curves and Perfect Competition Please complete work on sheet and SHOW your work! Problem 1 Posted: 10/20/2009 Due: 10/27/2009 The following chart represents the production function and cost curves for a firm. a) Please fill in the open squares given the information provided, and answer the related questions below. Assume that labor is paid a constant wage, i.e. our firm is a pricetaker in the labor market. Hint: use your definitions! MP L 0 --1 1 4 3 9 5 12 3 14 2 15 L 0 1 2 3 4 5 6 K 10 10 10 10 10 10 10 Q VC 0 4 8 12 16 20 1 24 FC 36 36 36 36 36 36 36 TC 36 40 44 48 52 AVC --4 AFC --36 2 9 ATC MC ----40 4 11 5.33 4.33 4 4 1.33 0.8 1.33 2 4 1.33 1.33 56 1.43 4 3 2.57 2.4 60 1.6 The following formulas can be used to calculate the necessary values for the chart. • • • • • • • MPL (Marginal Product of Labor) = (change in Q)/(change in L) In this case, labor is the only input that varies and we assume a constant wage. VC (Variable Cost) = L*wage FC (Fixed Cost) = TC – VC AVC (Average Variable Cost) = VC/Q AFC (Average Fixed Cost) = FC/Q ATC (Average Total Cost) = TC/Q or AFC + AVC MC (Marginal Cost) = (change in TC)/(change in Q) b) What is the relationship between ATC and MC, if ATC is decreasing as output increases? Specifically, can we tell if one is higher than the other? Why? When ATC is decreasing, MC is less than ATC. This is because the cost of producing each additional unit, represented...
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...1. The most common example of a market with perfect competition is agriculture. How could farm subsidies distort a model of perfect competition? Explain. In an ideal sense, agriculture is a prime example of perfect competition; easy entry and exit, homogeneous products, a large number of small firms, and open information of universal prices and technology used in the industry.The only other few markets that are perfect competition is the foreign exchange and internet auction industry. As agriculture maintains to be an industry that is the closest market to a perfect competition, farm subsidies tamper with the notion of having “a large number of small firms.”Although there are a large number of small firms, most of the subsidies that are...
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...HP Touch Pad The HP Touch Pad was created to compete with the Apple IPad. The HP Touch Pad was being sold at two different memory sizes and two different prices to provide potential buyers with a choice when determining which one to purchase. HP believed that they could outsell the IPad being offered by Apple. The HP Touch Pad was being sold at about $249 for the 16gb and $299 for the 32gb model respectively. Because of disappointing sales, the price of the HP Touch Pad decreased to extremely affordable prices of $99 and $149. When the sales declined, the product became more appealing to the consumer. The price was low so the demand for the product increased. Consumers purchased the product because of its price not because it was a better product to that of Apple. The product was being sold on Amazon, at Best Buy, and on Ebay. The product eventually sold out. Now the price of the HP Touch Pad has increase on these sites because the quantity of them available is scarce. The HP Touch Pad has become more popular because of its lower price, however the supply has decreased. HP has announced that they will be discontinuing the Touch Pad and this makes consumers want to purchase them because the product will no longer be available once the last one is sold. HP is giving consumers one last chance to purchase the remaining supply and companies such as Best Buy are now marketing them with low prices and using them as add ons to other purchases at a discount. In order to calculate...
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...Production and Perfect Competition In the first calculation, the total fixed costs = $1,000,000 and the total variable costs equals to $4.4 million, with four million for wages and 50,000 workers multiplied by $80 per worker, plus $400,000 of other variable inputs. The average variable cost equals to $22 million, with total variable costs of $4.4 million divided by 200,000 units. Worker productivity equals to 4, with 200,000 units of output divided by 50,000 workers. The loss is $400,000, with total revenue of 200,000 units of output time’s $25 price, equals to five million minus total cost of $5.4 million. The total cost can be calculated by multiplying the average total cost by 200,000 units of output, or adding the total variable cost to the total fixed costs. For the second calculation, the total fixed cost equals three million. The total variable cost has not changed, still at $4.4 million and the average variable cost will remain at $22. The average total cost equals to $37, since $4.4 total variable costs plus the $3 million of total fixed cost will be divided by 200,000 units of output per day. Worker productivity will stay at four and the loss will be $2.4 million, with total revenue remaining at $5 million and total cost equals $7.4 million. The shutdown rule is that if the firm can cover total variable costs at a certain level of production in the short run, it might keep operating. Fixed costs are not important in the short run because they are sunk...
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...Production and Perfect Competition Christopher Landeros Production and Perfect Competition When a firm is operating under a profit loss, it must decide whether to continue to operate under a short-run by reducing the number of employees or completely shutting down. To do this, the firm must calculate its Total Variable Cost, Average Variable Cost, Average Total Cost, and Productivity based on its fixed cost. A firm that has a fixed cost of $1,000,000 would not be able to keep the company operating just to break even, because the worker productivity rate would increase from 4 to 26 based on the number of remaining employees. Based on the $ 1,000,000 fixed cost, here are the calculated figures. 1. Total Variable Cost = $4,400,000 2. Average Variable Cost = $22 3. Average Total Cost = $27 4. Worker Productivity = 4 The average variable cost would be $3 less than the output cost but an increase of $2 on the average total cost. In order for the firm to work under a $1,000,000 break even scenario, it would have to cut 42,500 employees. The re-calculated cost would be: 1. Total Variable Cost = 1,000,000 2. Average Variable Cost = $5 3. Average Total Cost = $10 4. Worker Productivity = 26 The average variable cost would be $3 less than the output cost but an increase of $12 on the average total cost. In order for the firm to work under a 3,000,000 break even scenario, it would have to cut 17,500 employees. The re-calculated cost would be: 1. Total Variable...
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...Unit 1 IP Heather Williams | Potatoes | Chickens | Michelle | 200 / 4 | 50 / 1 | James | 80 / 2 | 40 / 1 | 1. What is Michelle’s opportunity cost of producing potatoes? Michelle’s opportunity cost of producing potatoes is 1 pound of potatoes is equivalent to ¼ of a chicken. The opportunity cost would be ¼ of a chicken. 2. What is Michelle’s opportunity cost of producing chickens? Michelle’s opportunity cost of producing chickens is 1 chicken is equivalent to 4 pounds of potatoes. The opportunity cost is 4 pounds of potatoes. 3. What is James’ opportunity cost of producing potatoes? James’ opportunity cost of producing potatoes is 1 pound of potatoes is equivalent to ½ of a chicken. The opportunity cost is ½ of a chicken. 4. What is James’ opportunity cost of producing chickens? James’ opportunity cost of producing chickens is 1 chicken is equivalent to 2 pounds of potatoes. The opportunity cost is 2 pounds of potatoes. 5. Which person has the absolute advantage in which activities? Michelle has the absolute advantage in both activities because she can produce more potatoes and more chickens then James. 6. Which person has the comparative advantage in potatoes? Michelle has the comparative advantage of potatoes 200/50 = 4 pounds of potatoes per 1 chicken, where James is 80/40 = 2 pounds of potatoes per 1 chicken. 7. Which person has the comparative advantage in chicken? James has the comparative advantage in chicken 40/80 = .50 or ½ chicken per 1 pound...
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...Similarities and Dissimilarities between[pic] Monopolistic Competition and Perfect Competition [pic] Vs [pic] Presented to: Sir Zahid Presented by: Muhammad Bilal Hussain Registration # K1f12mcom0009 Date:15 January 2013 Definition of 'Perfect Competition: [pic] A market structure in which the following five criteria are met: 1. All firms sell an identical product. 2. All firms are price takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each firm. 5. The industry is characterized by freedom of entry and exit. Definition of 'Monopolistic Competition: [pic] A type of competition within an industry where: 1. All firms produce similar yet not perfectly substitutable products. All firms are able to enter the industry if the profits are attractive. 3. All firms are profit maximizes. 4. All firms have some market power, which means none are price takers. Similarities and Dissimilarities between Monopolistic Competition and Perfect Competition [pic] The two market situations have the following similarities. 1. The number of firms is huge under perfect competition and monopolistic competition. 2. The freedom of entry and exit of firms is there in both the firms. 3. Firms compete with each other. 4. The break even point is established where marginal cost and marginal...
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...ECONOMICS INDIVIDUAL ASSIGNMENT QUESTION Explain why you, as manager of a firm in a perfectly competitive firm, would have no discretion in setting prices of your product ANSWER Perfect competition demands very strict assumptions that are unlikely to be found in many if any markets in the real world. Markets that most closely equate to perfectly competitive ones are those in which there are very large numbers of buyers and suppliers, reasonably free entry and exit from the market and well informed consumers. It is in such markets that the purchase decision is driven by price. A perfect competitive (price taker) market exists when the following conditions occur: • Low entry and exit barriers - there are no restraints on firms entering or exiting the market • Homogeneity of products - buyers can purchase the good from any seller and receive the same good • Perfect knowledge about product quality, price, and cost • No single buyer or seller is large enough to influence the market price Managers must take the existing market price; if they set a price above the market price, no one will buy their product because potential buyers simply will go to other suppliers. Setting a price below the market price does not make any sense because the firm can sell as much as it wants to at the market price; selling below the market price will just reduce profits. Because Managers must take the current market price a purely competitive market...
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...Chapter 16: Monopolistic Competition o The purpose of this chapter is to learn about a market structure in which many firms sell products that are similar but not identical. o Learning Objective: ▪ What market structures lie between monopoly and competition ▪ Competition among firms that sell differentiated products ▪ How the outcomes under monopolistic competition and under perfect competition compare ▪ Desirability of outcomes in monopolistically competitive markets ▪ Debate over the effects of advertising ▪ Debate over the role of brand names o Imperfect competition are those types of markets that are between perfect competition and monopoly ▪ Monopolistic competition is one such example. o Characteristics of Monopolistic competition ▪ Many sellers ▪ Products are slightly different • Producers are not price takers which means they each face a downward sloping demand curve ▪ Free entry and exit, therefore, zero economic profit in the long run ▪ Example: Pho, Cereal? o Short Run Equilibrium of Monopolistic Competition ▪ Profit maximization decision is similar to monopolist • Produce the quantity where MR =MC • Price is set on the demand...
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...and sellers in the market. Because of the large numbers of buyers and sellers selling the same product. This market is perfectly competitive. 2) In assignment 1, it was also stated that the market structure competitive and that the equilibrium price was to be determined by setting QD equal to QS. In a perfectly competitive market there are a large number of buyers and sellers. The products sold in this market are perfectly homogeneous. Examples of perfect competition are vegetable market, agricultural market, market for cereals etc. The main characteristics of perfect competition are: a) Large number of buyers and sellers b) Homogeneous product c) No entry barriers d) No transaction cost e) Perfect information A firm under perfect competition cannot affect the market price. They act as mere price takers. They take market price as given and sell any amount of quantity as per its capacity at that price. If a firm increases its price, consumers will then buy the product from another firm. Therefore a perfect competitive firm always sets its price equal to its MC. Suppose in the short run the firm is earning a supernormal profit. As a result, other firms will get attracted and will enter the industry. This will increase the industry output and market price will fall. This process will till the entire supernormal profit is exhausted and each firm ends up earning normal profits only. Therefore price will fall to the minimum point of the Average cost (AC) curve...
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...the company should institute in order to improve profitability and deliver more value to their stakeholders. Market Share U.S. consumers have switched gears into a more sustainable path toward healthy eating, which is now influencing the relative growth rates of different food categories (Black Book, 2007). Healthier versions of packaged-foods products have grown rapidly in recent years. These include food products that are either organic, fortified with vitamins or minerals, have reduced sugar, fat, or salt content, are high fiber, soy-based or gluten/lactose-free. In the first assignment the frozen low-calorie food market was in perfect competition. As the popularity of the low-calorie frozen meals expanded the companies had to find a way to stay competitive in the new monopolistic market. A monopolistic competition is a model of competition which describes a common market structure in which firms have many competitors, but each one sells a slightly different product (Economics Online, 2015). These products are differentiated from one another by branding or quality and hence they are...
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...Monopoly against Competition Introduction Monopoly, according to the Macmillan Dictionary (2009): “a company that has complete control of the product or service it provides because it is the only company that provides it”. And, as a matter of fact, a monopole firm will charge prices well above of the production costs and reap profits much further than a normal interest return on investment. In short, it is the opposite of a competitive market in terms of the number of sellers and degree of competition, as it opposes to perfect competition. While there are only a few monopolies in the United States because the government limits them, here in Brazil it is the opposite there are many public and private monopoles and they serve well the government for financing their political campaign in detriment of the people. The main conditions for a monopoly A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years. During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology. Polaroid priced the product high enough to recoup, over time...
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