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Economics - Assignment Example

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The conception of perfectly competitive market is based on the following assumptions of the firm is a price taker, product is homogeneous etc.
A commodity market is the best…
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Download file to see previous pages... Marginal revenue and Average revenue are constant and equal to price. The optimal level of output is given by Q* where, average variable cost, AVC is minimum. Thus for the competitive firm, the maximising profit condition is AR=P=MR=MC.
b) The term monopoly means single to sell and the person who sells is called a monopolist. Monopolists are called “price setter” and there is restriction to entry of innumerable firms in the market. The monopoly market is a one seller market and many buyers. Indian Railways example of monopoly. The main objective of a monopolist firm is to maximize its profit. The monopolist’s profit maximization point is illustrated in the Figure 2:
Here in short run, SRMC is the short run marginal cost and SRAC is short run average cost curves respectively. The monopoly equates MR=MC to find the optimal output Qm. at price Pm. In case of the cost conditions, if price (P) is less that the average cost, then the firm is experiencing loss and will shut down. In case of Long run equilibrium, monopolist requires LRMC=SRMC=MR and P≥LRAC.
d) Monopolistic competition falls between the two extreme economies of Perfect competition and Monopoly. The main characteristics of the monopolistic market is price differentiation , non-price competition as the products are differentiated among themselves, large number of firms in the market and freedom of entry and exit and freedom of the consumers. The monopolistic market faces a serious problem of decrease in the market revenue through price differentiation.
The major problem in the monopolistic competition is the introduction of product heterogeneity which makes difficult for the consumers to differentiate among competitive groups. Under monopolistic market is not clear to draw line.
3. A Price Discriminating Monopolist is better than a pure monopolist. Price Discrimination especially of third degree is always desirable from a social welfare point of view as it results in more ...Download file to see next pagesRead More
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