Microeconomics - Types of Markets - Research Paper Example

Download file to see previous pages... In the long run, the firms are ought to make a normal profit and the market price is determined by the forces of demand and supply. However, an important point to note is the situation in the long run equilibrium. If demand increases to a great extent, the price will rise. Therefore, the demand curve will shift upwards causing firms to make supernormal profits. More firms would join the industry and hence, the price will fall again settling at the equilibrium rate. Also, if the average costs are greater than the average revenue then most firms would go out of business. Once the supply curve falls, prices tend to rise. Perfect competition means there should be no imperfections in the market which may arise due to lack of knowledge or immobility of resources. Nonetheless, these factors are unrealistic in this world. One of the important reasons why perfect competition does not exist in the real world is the economies of scale. In most of the industries, a firm has to be quite large to experience economies of scale. But in perfect competition, firms have an insignificant market share and are too small to achieve economies of scale. Once a firm expands and achieves economies of scale, it would lower its costs and gain market power. The firm can reduce the prices and drive out the smaller firms from the industry. Hence a perfect competition can only survive in an industry where there are no economies of scale.
Although the perfectly competitive market model is not applicable to the real world setting, it plays a significant role in economic analysis and policy. The model can be used as a criterion to judge the deficiencies of the real world industries and can help the government to articulate policies towards the betterment of the industry.
A single industry that produces a product is called a monopoly. This is not it, however, no close substitutes are present and barriers to enter and exit the market are high. Such barriers include patents, heavy investments, copyrights or achieving economies of a scale comparable to the monopoly.  ...Download file to see next pagesRead More