Economics WK 5 Final: Competition and markets
Module 5 – Background info
COMPETITION AND MARKETS
Module 5 focuses on different types of market structure. For instance, a market with many firms is considered perfectly competitive. A perfectly competive firm must take the market price as given. Firms that are able to raise price without losing all demand are said to have market power. Markets where the firms have market power include a monopoly, oligopoly and monopolistic competition. Please read the following:
Required Reading
Bouman, John. () Principles of Microeconomics. "Unit 6: Profit maximization of a Purely Competitive Firm" (Sections 1-6 only) Retrieved from:http://www(dot)inflateyourmind(dot)com/pdfs/microeconomics.pdf (from Module 4)
Bouman, John. () Principles of Microeconomics. "Unit 7: Monopoly" Retrieved from:http://www(dot)inflateyourmind(dot)com/pdfs/microeconomics.pdf (from Module 4)
Bouman, John. () Principles of Microeconomics. "Unit 8: Monopolistic Competition and Oligopoly" (Sections 1 and Section 3 only) Retrieved from:http://www(dot)inflateyourmind(dot)com/pdfs/microeconomics.pdf (from Module 4)
Course Handout
Market Structure and Competition
Optional Resources
Amos, O. A Pedestrian's Guide to Economics Try the section on perfect competition, monopoly, monopolistic competition and Oligopoly. Retrieved February 18, 2011.
Investopedia. Economic Basics: Monopolies, Olipolies, and Perfect Competition. Retrieved February 18, 2011 from http://www(dot)investopedia(dot)com/university/economics/economics6.asp
Reynolds, R. L. (2005) Chapter 12: Pure Competition Alternative Microeconomic. Boise State University. Retrieved February 18, 2011 from:http://www(dot)boisestate(dot)edu/econ/lreynol/web/PDF/short_12_pure_comp.pdf
Reynolds, R. L. (2005) Chapter 13: Market Power Alternative Microeconomic. Boise State University. Retrieved February 18, 2011 from:http://www(dot)boisestate(dot)edu/econ/lreynol/web/PDF/short_13_Market_power.pdf
Note: All readings were validated on March 17, 2013.
Assignment instructions below.
Module 5 - Case
COMPETITION AND MARKETS
Case Assignment
Competition and Market Power
Review the following questions and prepare a 3 page paper on the following questions:
- Explain the difference between the demand curve facing a monopoly firm and the demand curve facing a perfectly competitive firm.
- Which of the following is (are) most likely to be produced under conditions resembling perfect competition - automobiles, beer, corn, diamonds, and eggs. Defend your answer in economic terms.
- Name one monopoly firm you deal with. What is the source of its monopoly power? Do you think it seeks to maximize its profits?
- This module focused on four types of firms:
- perfectly competitive
- monopoly
- monopolistic competitive
- oligopoly
Which of the above firms would most likely have zero economic profit in the long run (can be more than one type)? Explain.
Assignment Expectations
Use concepts from the modular background readings as well as any good-quality resources you can find. Be sure to cite all sources within the text and provide a reference list at the end of the paper.
Length: 3 pages double-spaced and typed.
The following items will be assessed in particular:
- Your ability to understand the differences between perfect and imperfect competition.
- In-text references to the modular background material (APA formatting required).
- The essay should address each element of the assignment. Remember to support your answers with solid references including the case readings.
Answer the following question below after the paper has been wrote this should go under the references page. ANSWER THE FOLLOWING QUIESTIONS SHOULD CONTAIN AT LEAST 7 SENTENCES.
Firms with market power are often able to practice price discrimination. This occurs when the seller can charge different prices for the same good. What are some examples of price discrimination that you have experienced in the market? What are some advantages of price discrimination for the firm? Consumer?
ECONOMICS WK 5 FINAL: competition and markets
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ECONOMICS WK 5 FINAL: competition and markets
Introduction
There are different types of markets within which firms operate and the nature of these markets determines the influence of firms on decisions such as fixation of prices of commodities. Changes in the prices of commodities would have an impact on the demand by consumers and various market structures are affected differently. Generally, an increase in prices would lead to lower demand. Some firms are able to significantly raise prices without losing customers while a small price increase in other firms would lead to great loss of customers. This paper will discuss aspects relating to the different types of market structure, namely: monopoly, monopolistic competition, oligopoly and perfect competition markets.
Demand curves for monopoly and perfectly competitive firms
The monopoly and perfectly competitive firms are characterized with different demand curves. A monopoly is the only firm in an industry supplying a certain commodity to the market and has many customers (Bouman, N.D). If the monopoly increases the price of the commodity, customers will still buy since they have nowhere else to obtain the commodity. Similarly, a reduction in price would not lead to increase in quantity of commodities bought since no new customers in the market. Therefore, changes in price have no significant change in quantities bought and the demand curve is said to be inelastic. On the plot of price against demand, the demand curve is vertical (Bouman, N.D). On the other hand, perfectly competitive market has many sellers and buyers who have knowledge of market forces. A small increase or decrease in the price of a commodity would lead to very large change in quantities bought as customers would buy from firms charging a lower price for the same commodity (Bouman, N.D). Due to this, a perfect competitive firm faces perfectly elastic demand curve. The demand curve is horizontal on the graph of price against quantity demanded.
Items likely to be produced under conditions resembling perfect competition market
The nature of the items would determine the structure of the market. This implies items such as automobiles, beer, corn, diamonds and eggs, are likely to be produced in under conditions of resembling different market structures. Of these, corn and eggs are likely to be produced in perfect competition market. This is because the items are farming produces, more identical and produced by many people (Bouman, N.D). There are also many buyers of the items and high number of sellers and new firms can enter the market. Forces of supply and demand are primary determinants of prices. Sellers who would increase prices would lose customers to competitors and substitutes that are readily available and would charge comparatively lower prices (Heakal, 2014). The other items: automobiles, beer and diamonds are not produced by many firms and have limited substitutes. The producers would influence prices without the loss of many customers. There are also fewer buyers of these items. Hence production conditions do not resemble perfect competition structure.
Example of a monopoly