Introduction To The Perfect Competition

Introduction To The Perfect Competition Microeconomics is about economizing choices among alternatives uses of scarce resources. The choices are made up by the individuals. businesses, and government units. Scarcity can be say as the central of the economic theory. Economic analysis is fundamentally about the maximization of leisure time, wealth, health, happiness, these are all commonly reduced to the concept of utility subjects to constraints. These constraints or scarcity define a trade off. For example, we can have more money by working harder, but less time because there are only so many hours in a day, so time is a scarce. Microeconomics, which deals with individual agents, such as households and business and macroeconomics that is considered the economy as a whole, in which case it considered aggregate supply and demand for money, capital and commodities. In short, microeconomics is to study about the economics behavior of individual consumers, firms, and industries and the distribution of production and income amon g them. It can be considers individuals both as supplier of labour and capital and as the ultimate consumers of the final product. Beside that, it can be use to analysis both firms both as suppliers of products and as consumers of labour and capital. Microeconomics also helps to seek analyze the market or the types of mechanism that establish relative prices among the goods and services or allocates societys resources among their many alternative uses. Microeconomics is a very important knowledge in the study of economic theory, it has both theoretical and practical implications. Microeconomics is a great help that are efficient in managing the limited resources available in the country and it is helpful to understand the work of the free enterprise economy where there is no central control. Microeconomics is the basis of welfare economics, it is used to construct the economic models for the better understanding of the actual economic phenomena. Microeconomics also explains how thro ugh market mechanism goods and services produced in the community are distributed. Microeconomics is utilized to explain the gains from international trade, balance of payments disequilibrium and the determination of foreign exchange rate. 2.0 Introduction to Monopoly Monopoly is the market structure that exist a single seller and a very large amount of buyers and selling products that have no close substitution and also have a very high entry and exit barrier. In our country, the example of monopoly market are the TNB, Indah Water, and Telekom Malaysia (TM Berhad). If people want to subscribe home telephone services they only can go to the Telekom Malaysia ( TM Berhad ), because Telekom Malaysia (TM Berhad ) is a monopoly. The word monopoly is a latin word, where mono means single and poly means sellers. Monopoly have firms that it is the only supplier in the market, and there will be no close substitute towards the output so monopoly have no treat of competition. 2.1 Characteristics of Monopoly There are some characteristics of monopoly market. According to (www.economicsonline.co.uk) monopolies have the ability to maintain a very normal profits in the long run. As with all firms, profits are maximized when Marginal Cost ( MC ) = Marginal Revenue (MR). In overall, the profit level are well depend upon the degree of the competition in the market, which for a pure monopoly is zero. At the profit maximization, MC = MR, and the output is Q and the price is P. Given that the price ( AR ) is above ATC at Q, supernormal profits are possible ( area P,A,B,C ). Super-normal-profits Monopoly exists when there is only one seller of a product. Monopoly is the firm that only exist in the industry selling a product that has no close substitution. Monopoly market is the place where the monopoly firm operates. In short, there is no difference between a firm and an industry in monopoly as there is only have one seller. A monopolist is a price maker, price maker are defined as firm which has the market power to control the prices. Since there is only one seller or producer so they have the power to control the price of their products in the market. Monopoly firm only sell product that has no close substitute, so that consumers or buyers could not find any substitute for the product that they require. For example, electric supply from our country can only found in TNB which has no close substitute for it. In the monopoly market, there is also some strict barriers to the entry of new firm. Barriers to entry are most likely natural or legal restrictions that restrict the e ntry of new firms into the industry because it is very high cost to enter a market that can support only one business example: TNB, Indah Water and Telekom Berhad. So a monopolist faces no competition because of the barriers of entry because other producer cannot compete with them due to they dont have the resource at their disposal. Business in monopoly firm may have the copyright for its own product so it will be illegal for other producer to duplicate its product. In short, barriers to entry are designed to block potential entrants from entering a market profitably because barriers to entry are to protect the monopoly power of existing firms and therefore it maintain the supernormal or abnormal profits in the long run. Advertising in monopoly market are depend on the products that the producer sold because if products are luxury goods such as imported car, then the monopoly needs some advertisement to promote their goods so that the consumers are informed about it. Local public u tilities such as water, electricity and home phone services do not require advertisement because consumers will know where to obtain it because there is only one to get the products. 2.2 Conclusion for Question 1 In conclusion, we have learned about monopoly is a market structure that is only single seller and a large numbers of buyers and products that have no substitution. And also there is a very strict barrier of entry and exit to the monopoly market. 3.0 Introduction to The perfect competition Perfect competition is a type of market where there are large number of buyers and sellers, the sellers sell identical or homogeneous product. There is also free entry and exists of the firms. Both of the buyers and sellers have perfect knowledge of the market. 3.1 Characteristics of The perfect competition There are some necessary conditions or requirements in order to be in a perfect competition market. Being with the perfect competition market, there is an important feature of perfect competition is the existence of the large number of buyers and sellers. The market is so small compared to the overall industry where a single seller sells in the market. For example, in the poultry industry, there are thousands of duck producers in Malaysia and each firm produces only a small fraction of the total poultry industry. Another conditions for perfect competition market is that the firm must sell homogenous or standardized product because the buyers do not differentiate the products of one seller to another seller. For example, the buyers cant differentiate about the ducks that is selling in the Firm A and Firm B. Hence, the firm cant charge different prices for the same product in the market. Once the buyers notice the difference of the quality, packaging, colour or design of different sell ers, then this market is no more in the state of perfect competition market. Even the products are similar but if there is a difference in terms of the packaging and quality then the product is not a homogenous or standardized product anymore. Under the perfect competition market, there is no restriction on entry of new firms to the industry or exit of the firms from the industry. A firm can enter the perfect competition easily and exit the perfect competition anytime if the firm wants. For example when he/she has the necessary factors of production like land, labour and capital then he/she can operate the business already. If the firm suffers from losses it can leave the industry without any rules and regulations or restrictions. 3.2 Introduction to The monopolistic competition Monopolistic competition is a market structure that have large numbers of small sellers selling differentiated products but these are close substitute products and also have a easy entry into and exit from the market. Compare to perfect competition, monopolistic competition market produce different and sold different but the goods are close substitutes for one another. There are many products in the world represent monopolistic competition such as clothes, shoes, books and other items. 3.3 Characteristics of The monopolistic competition The characteristics of monopolistic competition market are quite similar with the perfect competition. Similar to perfect competition, there are large numbers of sellers and buyers under the monopolistic competition market. There are large number of firms existing in the monopolistic competition market but it is less as compared to the perfect competition market. Since the size of the firms are small, there is no individual firm can influence the market price. But, if each firm in monopolistic competition market produces different or unique products then they will have some control over the prices. Hence, each firm follows an independent price-output policy. For example, in wax industry, the prices of a 100ml wax range among brands such as gasby, mudwax, spiky and other firms as well. Product differentiation means that the product in the firm is selling or producing are not identical. In monopolistic market competition, the firms that producing the goods are different from its compet itor. Each seller will use different methods to differentiate their product from other sellers to attract the buyers and consumers. Product differentiation will gone through the packaging, design, labeling, advertising and brand name. For example, if the firm sold eggs that is in the open shelf, then the eggs will category in perfect competition market. But if the firm packaged their egg in a packaged box and labeled as Best Protein Egg, then this egg is in the monopolistic competition market. In monopolistic competition market, there is no entry and exit barriers in monopolistic competition. However, the entry and exit into the monopolistic competition market is not as easy as the perfect competition market because of the products differentiation. If any new firms that enter the industry, they have to find some differentiation with the existing brands. For example, if Chicken A1 wants to enter the soup industry, then the firm must find some difference in term of quality, taste, lab eling, and packaging in order to be in the monopolistic competition market. In the monopolistic competition market, there will be stiff competition with other firms for their products and not for the price of the product. Monopolistic competitive firms do not compete using the prices because of the products in the market are having a lot of substitutes. So, the producers or sellers uses various methods to attract the customers to buy their products. Types of non-price competition practices in monopolistic competition market are advertisements, promotion, discounts, free gifts, after-sales service and others. 3.4 Introduction to The oligopoly Oligopoly is the market structure that there are only a few enough firms selling either standardized or differentiated products and it is very restricted to enter the entry and exit from the market. Under the market structure, some or all the firms in the industry can earn abnormal profits in the long run. This is because of the entry of new firms is difficult or impossible. The oligopolistic firms can impose barriers to the entry in terms of patents or access to a certain technology in the market. The purpose of it is to control excess the production of output, which is unprofitable for the oligopolistic firms. The example of the oligopoly markets are cigarettes, automobiles, electrical equipment and cement. 3.5 Characteristics of The oligopoly The characteristics of oligopoly market are having few numbers of firms. Under oligopoly, the number of firms is small but the size of the firms is large. The market share of each firm that is large enough to dominate the whole market. Few firms control the overall industry under oligopoly. But there is also no specific numbers to control the market before becoming oligopolistic. The main important criterion to become oligopolistic is to have mutual interdependence between these firms. Under the situation like this, firms will considered the reactions of its rivals in decision making to create strategic interdependence. There will be strong interdependence among all the firms in the oligopolistic market as the number of the firms will become smaller. But if the number of the firms become larger, then the interdependence between these firms will diminish. In oligopoly market, a product that is sold under oligopoly can be either a homogeneous or a differentiated product. Example, cemen t or electrical appliances produced by one firm are identical to another firm. Firms that is in oligopolistic market always consider the reaction of other firm rivals when both are choosing price, sales target, advertising budgets and other business policies. This is the important characteristic of an oligopoly firm that differs from other market structures. Because of the number of firms is small, changes in price or output by one firm can have direct effect on another firm. Under the situation of oligopolistic market, there are plenty barriers to entry that is similar to monopoly. The oligopoly firms have restricted new entrants into the markets. The barriers are to control the certain resources, ownership of patent and copyright, exclusive financial requirements and other legal barriers. In short, large firms may take drastic actions in order to prevent the entry of new firms by flooding the market. These large firms will produce the output at excess production capacity, which wo uld drive the price down. That means new firms that is newly set up will not survive because sometimes the price are set by these large firms is below the cost price. Once the new firms are out of the market, the large firms will reduce the production capacity and increase the product price. 3.6 Introduction to The monopoly Monopoly is a market structure where there is only one firm in the industry and there is no substitution to it. Monopoly have a very high entry and exit barrier because it is very high cost to enter a market that can support only one business. Monopoly is also a price maker, which has the market power to control the price. 3.7 Characteristics of The monopoly Monopoly is just the only seller of the product. The monopoly firm will be the only firm industry that is selling product that has no close substitution at all. Which means consumers can only find the only firm that is selling the only product, consumers could not find any substitute for the product. Besides that, monopoly market have a very strict barriers to the entry of the new firm. Advertising in monopoly market is actually depend on the product it sold. Normally public utilities such as water, electricity and home phone services do not need advertisement because people will know where to go for the product unless it is luxury goods like imported car then it will be needed advertisement to let consumers know about it.