The Concept of Microeconomics - Research Proposal Example

Micro-economics Plan of the Paper Outline The paper on micro-economics presents various concepts in a descriptive manner. The paper takes the approach of answering questions one by one. A synopsis is given in the beginning so as to give a brief account of what is going to be discussed in various section of the paper. In addition to that, the structure of the paper is given with an intention to give the readers an understanding of how the various answers are arranged in the paper. Details of the Plan The present paper is planned to attain the objective of clear understanding of the concepts in micro-economics, which are of high practical utility. The paper attempts to present the concept first followed by its practical utility. The concepts presented are perfect competition, monopoly, imperfect competition, and oligopoly. These concepts are of high practical importance and every one can be felt, if she/he observes the market. The concepts are described in a simple and lucid manner, which can be understood even by a layman. No chart and graphs have been used to support the description. . Structure of the answer The paper is prepared in such a manner that each question is followed by its answer so that it will be of immense help to the reader to easily understand the situation. A brief structure of the answer is given below: 1. Outline the characteristics and behavior of firms in perfect competition 2. Why is the perfectly competitive model seen as useful for economists today? 3. When, if ever, the existence of monopoly be justified? 4. Evaluate the different ways in which the problems posed by monopoly may be reduced 5. If the demand for the imperfectly competitive industry increases, what happens to the price of the product, the output of the industry and the profits of the firm within the industry? 6. How may the existence of barriers to the entry affect the output? Synopsis This paper is meant to attain the academic objective of thorough understanding of the concepts in micro-economics and its usefulness in the actual market. The paper attempts to present the concepts in a simple and comprehensible manner so that the reader can get a clear picture of what is described. A perfect market is a market condition where there are large number of buyers and sellers. The sellers are allowed to enter and exit the market at any time. A perfect market encourages competition and price stability. At the same time, better quality product/service can be expected as buyers have many choices to select their seller. A monopoly is a situation wherein single seller exercise control over all the operations in his/her product market and makes use of every ups and down in the market for economic gain. A monopolistic market is featured by many small sellers in the market. Each seller is small relative to the total market and naturally the pricing decision of the firm has only a negligible effect on the total market. Firms in the industry make differentiated product. Question No. 1. Outline the characteristics and behavior of firms in perfect competition From economist’s point of view, a market is a distinctive mix of various market forces like number of buyers and sellers, free/ barriers to entry or exit of firms, homogeneous/heterogeneous product and so on. These features are not common to all market, but different from firm to firm. For example, perfect competition market is different from monopoly market and oligopoly is different fro these two markets. Theoretically, there are many market structures but, in the actual practice only a few can be operationilsed. A perfect competition market may be defined as “a competitive system in which a large number of firms produce a homogeneous product for a large number of buyers” (G Stigler, 1957) When a market has large number of sellers and buyers dealing in almost similar product/service, then such a market is called perfect competition market. The salient features of perfectly competitive market are: 1. Too many buyers and sellers This is the most important characteristic of perfect market. The sellers are not restricted to enter and exit the market. They are at liberty to choose the market, where they should sell, and to whom the products are to be sold. 2. Identical Product/service A perfect market has full of similar/identical products. Therefore the buyers have the choice to select any seller. This creates stiff competition in the market resulting in quality products and price stability. 3. Unrestricted Entry or Exit This market has no restrictions as to the entry or exit of firms from the market. Any seller desirous of selling similar product can enter the market and compete with other firms. Question No.2. Why is the perfectly competitive model seen as useful for economists today? Perfect competitive market is the commonly seen market in the economy. A perfect competition is said to exist when several firms produce and sell similar products in the same market. They compete with others to attain majority of the market and to have maximum profitability Features of firms in the perfect competitive market In a competitive market, no firm can take any decision on its own. It has to accept the market forces such as demand and supply as a whole. Following are the important characteristics and behavior of firms in the market: 1. Price Taker, but not price fixer The position of the firm in a perfectly completive market is that of a price taker and not a price fixer. No single firm has any control over price. Rather, it has to accept the price fixed by the whole market forces such as demand and supply. If any one increases the price ignoring the market price, it will loose the demand and may be thrown out of the market. 2. Similar cost structure The cost structure of all firms in the market is similar. That means all firms incur similar cost and when the cost data are put on a graph, all the firms will have similar cost curves. Sine all the firms operate under the same market conditions, marginal cost is considered as the most important factor. 3. Profit is decided by how many products sold and not by what is sold The profit of a firm in the perfect market is determined by the number of products produced and marketed by the firm. The profit per unit remains the same for all firms and if a firm needs to increase its profit, the only way is to produce and market as much product s as needed. Question No. 3 When, if ever, the existence of monopoly be justified? Monopoly is a market situation where the needs of all buyers are met by a single seller. Monopoly exists where there is no competition in the market. In a monopoly market, the buyers have no alternatives to select and purchase from among a number of sellers. The most important characteristic of monopoly is that the single seller determines the price of the product, the supply at any point of time, and indeed, the quality of the product. The worst thing about monopoly is that the seller has a voice in the market and he may utilize it for charging high price or sacrificing quality. Nevertheless, in the following situations, monopoly cannot be avoided. 1. Resource Monopoly There can be situations where certain resources, natural or acquired are the sole property of a person or organization. For example, oil, minerals, etc. Gulf countries enjoy monopoly over oil products. But, with respect to monopoly over acquired resources, this theory does not hold good always. In the modern jet age, monopoly over acquired resources cannot be materialized. 2. Unique skill of the seller Suppose, a product is produced/ service is rendered only because of the unique skill of the seller, then it is justifiable as long as any other one acquires the same quality. 3. Legal Monopoly A producer may have a legal monopoly over the method/know-how. Such monopoly is conferred upon by means of patent or copy right for product/service. Question No. 4. Evaluate the different ways in which the problems posed by monopoly may be reduced Monopoly is not a pleasant market condition for consumers and society. A monopolist poses certain threats to consumers and the society as a whole. High price and Dumping The monopolist has the freedom to fix the price of his own. Often, he may charge different price for the same product at different places. This practice is known as dumping. No choice Buyers in the monopoly market have no choice other than the product of monopolist. Buyers have to satisfy themselves with what is offered by monopolist. They must pay the price charged by monopolist regardless of the product quality. No innovation Since monopolist is the only seller in the market, he will not try for any innovations and improvement in the product. he always prefer to take as much profit as possible from the market. underutilization of resources Monopoly sometimes results in under utilization or non-utilization of available resources. Monopolist has enough business and he may not be interested to explore innovative ideas and business opportunities. Monopoly of any kind is a problem for customers and to the society as a whole. The authorities are always thinking about restricting the monopoly, which pose some threats to the society and to the customers. They are obliged to protect the interest of consumers and society and to keep the monopolists away from unethical business practices. Question No.5. If the demand for the imperfectly competitive industry increases, what happens to the price of the product, the output of the industry and the profits of the firm within the industry? Basically, there are two types of market structure, namely perfect market and imperfect market. A perfect market is which have large number of buyers and sellers, free entry or exit of firms, easy information availability etc. “An imperfectly competitive industry is an industry in which single firms have some control over the price of their output”. (Imperfect Competition Notes. Page.2, n.d.). The members in the family of imperfect competition are monopoly, monopolistic and oligopoly market. The firms in the imperfect industry can increase the price of their product without losing the all the demand for the products. The effects of demand increase in the imperfect market on the price of the product, output of the industry and the profits of the firm are discussed below: Monopoly Market In a monopoly market, monopolist is single seller and hence the industry. He can fix the price of his own and maximize the profit as he desires. He is not ready to reduce the price of the product even at the time of reduction in the cost of production. He may utilize the available resources for making sole economic gain. Oligopoly Market This is another variant of imperfect market. An oligopoly market is characterized by the presence of few firms producing and selling identical products. An oligopoly market may be defined as “a market structure in which relatively few firms produce identical or similar products.” (Imperfect Competition Notes. Page.28, n.d.) All the firms in the industry are interdependent and have some power to influence the price. The products in the oligopoly market are either identical product or differentiated products. The competition is a non price one. Oligopolies are price makers. The method used to increase sales and profit is advertising, attractive packages, and other sales promotion techniques. When the demand for the product increases, the customer may turn to the cheapest product in the market. By reducing the price in the market, an oligopolist can increase the demand for his product. Monopolistic Market This market comprises of small firms doing the similar business and meeting a certain percentage of the total market demand. A monopolist makes product differentiation and hence, all of them can do a certain percentage of business. Therefore, the products in the market are close substitutes but not perfect substitutes. Advertising, packaging, product development, better qualities are the tools to promote sales. Because of product differentiation monopolistic firm is a price maker rather than price taker. In the short run monopolistic firm is as similar as monopoly. Therefore in the short-run, the impact of demand increase in the market on the price of the product, output of the industry and the profits of the firm in the industry are almost same as that of monopoly market. In the long-run, monopolistically competitive firm will earn only a normal profit. The effect of change in the demand, therefore, is similar to perfect competition. Question. No. 6. How may the existence of barriers to the entry affect the output? When there are no restrictions in the market for entry or exit of firms, it may lead to stiff competition and improved product quality. A free market condition is one where firms are allowed to enter the market and start selling products. The entry into the market is free in case of some market conditions, but restricted in some other cases. The output in the market will increase when firms are allowed to enter the market without any restriction. In contrast to this, when there are barriers for the free entry to the market, the demand of all buyers may not be met and hence, affect the output adversely. The perfect market condition allows entering and exiting from the market. A monopoly market and an oligopoly market restrict the sellers to enter the market. References G Stigler, (1957)Perfect Competition, Historically Contemplated, Journal of Political Economy, vol. LXV. Viewed 19 November, 2008, Imperfect Competition notes: (n.d.) viewed 19 November, 2008, Investopedia (2008), Perfect Competition, viewed 18 November, 2008, Lecture Outlines (n.d.), Monopolistic Competition and Oligopoly, viewed 19 November, 2008, Perfect Competition (n.d.), Economy Watch, viewed 19 November, 2008, Roderick Hill, (March 2006), The Overemphasis on Perfectly Competitive Markets in Microeconomics Principles Textbooks. 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