Competition and markets - Essay Example

Factors determining the elasticity of demand are market demand elasticity, the number of businesses in the market in addition, the firm’s interaction in the market. In monopolistic situation, the demand curve is always downward sloping and the industry demand curve is the firm’s demand curve. The marginal revenue of a monopolistic firm is always below its price and the marginal revenue usually changes with the changes in output but not equal to price. The marginal revenue decreases with increase in output since the monopolist can only sell more units by reducing prices.

Average Revenue curve is the demand curve and the average revenue is similar to price, however, Marginal revenue must always be less than the Average Revenue even as output increases with fall in prices (Mankiw 2011). Firms in competitive markets sell absolutely similar or homogenous products and are referred to as price takers. Perfectly competitive market comprises of many suppliers who cannot single handedly influence either the market price and the total market output hence each supplier can only control a small part of the total market demand.

The suppliers output is greatly controlled by the market forces and the price in which the suppliers must sell their products is at prevailing equilibrium price such that any increase in prices may invite another supplier who may be willing and able to supply at the equilibrium price. The inability of producing more goods than the market demand and the incapability of raising prices results into a horizontal or perfectly elastic demand curve. As much as a supplier may be able to reduce product’s prices, it may result into a loss hence the need to embark on the market price (Mankiw 2011). 2. There are various characteristics associated with the perfectly competitive markets such as the large number of firms in the market, assumption of non-existence of externalities, minimal government regulation, homogeneity in the units of input, production of homogenous goods, non-existence of barriers to entry, and the availability of perfect knowledge.

In perfect competition, different firms produce goods that are perfect substitute and whose prices cannot be easily changed by a single firm. Automobile may be produced under the market conditions similar to perfectly competitive market because of the fact that motor vehicles manufactured have very close substitutes. In addition, there is no barrier to entry and the suppliers cannot increase the vehicle prices abnormally. In case an automobile company reduces prices of its products, they may run at a loss.

Moreover, the automobile firms can only manage and control a few customers in the larger market making it hard for them to determine the quantity of the automobiles to be manufactured and their prices (Mankiw 2011). Beer production also fits perfect competition conditions since beer product produced by one firm may as well be produced by another firm with may be very slight content changes. The fact that beer is manufactured by using almost similar product makes it challenging to differentiate the beer products.

Furthermore, as a characteristic of perfect competition, there are many beer consumers as well as numerous beer manufactures. The beer consumers are always very loyal but highly sensitive to price changes thus any slight change in price upwards, may hinder the consumers from using one particular product. In