Perfect Competition and Monopoly Market Structures - Coursework Example

RЕSЕАRСH ЕSSАY Name: Tutor: Course: Date: Table of contents Table of contents 2 Introduction 3 Perfect competition market structure 3 Monopoly market structure 5 Perfect competition market appropriateness 7 Outcomes of perfect competition market in the flower industry 9 Relevance of monopoly market 11 Electricity sector in China 11 Outcomes of monopoly market 12 Conclusion 13 Reference List 15 Introduction In any market structure, there has to be firms that produce products that are identical and homogenous. These types of market structures include competitive markets, oligopoly and monopoly. This paper majorly bases on perfect competition and monopoly market structures and their contribution to an economy of a nation. It also identifies short and long run effects of both market structures Perfect competition market structure Perfect competition is a market situation where the following conditions are applied. 1. There are many buyers and sellers in the market therefore no firm can have control of the prices over the others 2. All the buyers and the sellers are after profit maximization 3. Both the buyers and the sellers are free to enter and leave the market 4. Both the buyers and the sellers have enough information regarding the prices, the quality and the availability of good being sold in the market 5. All the goods being sold are homogenous therefore they are substitute to each other. In the short run, firms in the competitive market structure make some profits before attracting other new firms which create more competition in the long run therefore reducing the profits. This situation is shown in the diagram below, where the price or average revenue denoted by P is above the average cost denoted by C In the long run, a profit that was made by the firms cannot be sustained. Expansions of the existing or entry of new firms in the market will cause a downward shift of demand of every firm therefore making a downward shift of the prices and also that of marginal revenue and average revenue curve. The end result is that in the long run, all the firms will make normal profits only(Clifton, 2006). The horizontal curve will touch the average curve at its lowest level as shown in the diagram below. Monopoly market structure This is a market structure where there is only one single seller that produces a product which has no other substitute. The single seller of the product or a service can be an individual owner, partnership or a company. Monopolist makes the price in the market and controls the supply of goods in the market Features or characteristics of a monopoly 1. This market structure has the following features: 2. There is a single seller who has control over the supply of a commodity or a service 3. There is no close substitute of the product 4. A monopolist makes the price 5. There are some restrictions that prevent entry and exit of new firms 6. A firm in monopolistic market structure has downward sloping demand curve where it can sell more at least and vice versa. The elasticity of demand is therefore a very important factor to a monopolistic firm. 7. The firm and the industry are one and the same thing since there is only a single firm in the market. In the long run a monopolist can make super normal profits since it has no competition i.e. profits will be maximized when MC=MR. the diagram below profit maximization of a firm at long run where MC=MR and the output is indicated by P and the price is P. since price (AR) is above ATC at Q, the firm makes supernormal profits as shown by shaded area (PABC) Since there is no competition, a monopolist can earn super-normal profits as shown in area PABC. A monopolist also has a lot of power since there are no substitutes. In comparison, both perfect and monopolistic markets have several differences. For instance, in perfect competition market, there are several firms in the market and one firm cannot determine nor have control over the price to be charged (Lee, 2008). On contrary, in monopolistic market, there is only single firm that determines the price to be charged. Price discrimination in practice Several firms with demand curve that is sloping downwards can do market discrimination by charging different fares based on status or age, setting different prices on seats during sporting events, offering senior citizens with some restaurant discounts and also offering discounts to customers who buy in large quantities (Layton Robinson & Tucker 2012). For instance, with price discrimination in the market full of travellers(as shown in the diagram below), higher fare F1 is charged on market segments that has low price elasticity, a lower fare F2 is charged on high elasticity market segment. The profit earned on the first segment is represented by the area F1, O, Q1, 0. the profits for the second segment is represented by the area F2, O, Q2, 0. Total sum of all these areas will be greater than areas without discrimination (Layton Robinson & Tucker 2012). The more the price charged, the more the revenue earned Perfect competition market appropriateness For an industry to perfectly competitive, it has to have several buyers and sellers, free entry of firms, product homogeneity and the participants should have sufficient information. Free entry and exit is a clear indication that there are no barriers being put to prevent new entrants of new businesses. Therefore a new company which feels the investment is worth to be undertaken due to high profits can establish its business without any government intervention or restriction Flower market industry in China Perfect competition has been seen mostly in the flower industry. The industry has been one of the growing industries both in China and entire world. China has been one of the biggest flower growing and consuming countries in the world in recent times. Its flower growing has been over 100, 000 hectors with annual capacity of producing over 2.5 billion sales of fresh flowers. According to the study conducted by the ministry of Agriculture of China in 2005, it showed that there were over 60,000 companies both large and small companies which were involved in flower production (Li, 2012). In Yunnan province of China, 4.7 billion fresh flowers were sold to various countries which amounted up to 3.4 billion Yuan. Yunnan province grew over 42000 hectares of flowers in 2010 up from 16000 planted in 2005. Flower yield in the province grew from 3.6 billion to 6.05 where the total income for flower farmers in Yunnan rose from barely 2 billion Yuan in 2006 to over 6 billion Yuan in 2010. Growing foreign flower market has offered Chinese flower industry a big room to expand its business. There have been several flower dealers who buy flowers from Yunnan province and sell them in other cities in China. Businessmen trading on flowers in this section could earn profits up to 20,000 Yuan in sales. Since this was a competitive market, it attracted other dealers who were motivated by the huge amounts earned by the first dealers. At the long run, flower dealers became more in the market which reduced the amount of profits earned by the dealers (Petri, 2004). The figure below shows the equilibrium point where all the flower dealers were will to trade in the market. New entrants pushed the equilibrium to position Q where they only earn normal profits As it can be seen in the case of the flower industry, it has been characterized by the presence of small and medium companies involved in the flower production. It is well evident that that there have been new entrants of flower producing firms and also exit of non-profitable firms in the market. Currently, China’s flower industry is attracting new entrants from WTO which has identified China has one of the opportunity to invest. Outcomes of perfect competition market in the flower industry Perfect competition market in the flower industry in China has resulted into new entrants of new firms into the flower production. Profits earned by existing firms have attracted other firms into investing into flower industry. As mention earlier, there have been a lot of companies that have invested in the industry therefore impacting the economy of china in several ways. First of all, existence of large and small companies has led to job creation where florists, technical expertise and employees have been employed. This is a source of employment where several people have received source of income. The standard of living of all these people who were employed in these companies have been enhanced since their purchasing power has increased(Li, 2012). In addition, emergence of several flower companies has been a huge source of government revenue through taxation. The Chinese government is able to impose corporate tax to both existing and new firms therefore improving the economy of the country. Perfect competition market structure brings competition among the flower companies since every company is trying to outdo the others in the market. Competition leads to innovation of new product line and new production process. This mostly happens since every company is trying to innovate the cheapest way to produce a product which might reduce the price to be charged on the customers. This therefore enhances growth in technology in the country thus improving the economic growth (Lee, 2008). Generally the flower industry has been one of the foreign exchange earners in China. Flower exports have earned the country foreign exchange up to US $260 million. It can therefore be deduced that flower industry has put China into the world map as one of the leading flower producers in the world. This has been largely achieved as a result of perfect competitive market structure which has allowed free entry and exit of flower producing companies (Li, 2012) Relevance of monopoly market From the definition, a monopoly is a market structure one of the firms have control over the market supply and there are no new entrants into the market. The appropriateness of monopoly market can be seen in the following case study. Electricity sector in China Electric power industry in China has dramatically changed since 1990s to become the second consumer industry in the world after USA. China has the world massive hydroelectric resources and among the largest coal reserves in the world. The government has natural monopoly over the supply of electricity. Power industry in china has increasingly become competitive over the last years due to structural reforms initiated by the government and also the country’s entry into World trade Organization. China’s power industry has maintained a tremendous growth as has seen the increase of over 16 GW into the national grid(Jiang & Fan, 2006). China’s power industry is characterized by restrictions imposed by the government so as to prevent new entrants into the industry. The government has domestic monopoly over the supply of power since it cannot be left in the hands of the private sector. Monopoly is appropriate where the government intends to prevent its citizens from exploitation from the suppliers. The government of China has allowed the monopoly of power so as to allow the stability of prices since power supply cannot be left to the forces of supply and demand which may exploit the consumers. Furthermore, the government earns revenue from taxations in this sector which assists in funding other sectors of economy (Levine & Boldrin, 2009). The monopoly also offers a vital service which require huge amount of investments effectively and efficiently. Outcomes of monopoly market Monopolistic market has both positive and negative effects. On the positive effects, it reduces the wasteful replication of few resources. In the case of natural monopoly, competitive supply would be regarded as wasteful. In a natural monopoly, most of the economies of scale are derived by a single firm which restricts other firms from entering into the market. In this case having several firms means wasteful duplication of resources (Aumann, 2004). The revenue of the government increases as a result of monopoly in the power industry. The revenue earned can be used to boost the GDP of the country where the government can employ others to work in the public sector(Clifton, 2006). Furthermore, there is creation of job opportunities where several people can be employed in the companies Although there are few monopolistic firms, they pay taxes to the government which a source of the revenue on the side of the government. In addition, monopolistic firms enhance equal distribution of resources of resources in the entire country. For instance, the companies that supply power ensure that it serves all the parts of the country therefore enhancing economic developments in the country. On contrary, monopoly has been under criticism for various reasons. Some of the reasons include: Less employment opportunities: this is a result of monopolistic firms employing few people since more firms are restricted from entering certain market. Employment opportunities depend on the number of firms i.e. the fewer the firms, the fewer the job opportunities. Inefficiency in production: monopolies may be inefficient in its production since there is no competition. Unequal information: there is no sufficient information on the side of the consumers since the a monopolist may be knowing more than the consumers thus leading to consumer exploitation High prices: a monopolist may overcharge the consumer since there is no other alternative left for him Comparison In comparison, both perfect competitive market structure and monopolistic market structure makes some contribution to the growth of a country. Both the market structures provide job opportunities where several people are employed to work in these firms. Firms in both market structures pay taxes to the government which is a great source of revenue (Aumann, 2004). In the perfect competition market, there is no government control on the firm since any control can create some market imbalances unlike in monopolistic market structure where there is government control. The government puts some restrictions so as to protect the public against exploitation. Conclusion Few industries or markets in the real world are competitive. Nevertheless, it is still useful in the market. As it can be seen, perfect competition market allows free entry and exit of firms into the market. This allows healthy competition among the firms which in turn results to innovation as firms are trying to innovate ways of reducing the prices of commodities. Absence of government intervention allows the market forces of demand and supply to operate thus setting the equilibrium prices that is applicable to all firms. On the other hand, monopoly market structure also plays an important role in delivery of some vital services in the market. Restriction imposed by the government on entry and exit of some firms into the market has protected the public against exploitation in delivery of services like electricity and water. Reference List Aumann, R J 2004, Markets with a Continuum of Traders. Econometrica, 32(2), p.39–50. Clifton, J A 2006, Competition and the evolution of the capitalist mode of production. Cambridge Journal of Economics., 1(2), p. 137–151. Jiang, K & Fan, L 2006, Reform of China's electric power industry: facing the market and competition. International Journal of Global Energy Issues, 32(12), p.188–195. Layton A, Robinson T & Tucker I 2012, Economics for Today: Fourth Asia Pacific Edition (4th Edition). Lee, F S 2008, Post-Keynesian Price Theory. Cambridge: Cambridge University Press. Levine, D & Boldrin, M 2009, Against intellectual monopoly. Cambridge : Cambridge University Press. Li, J 2012, Market analysis: Chinese flowers. Marketing Journal, 3(2), pp.213-28. Melvin & Boyes 2009, Microeconomics. Houghton Mifflin. Petri, F 2004, General Equilibrium, Capital and Macroeconomics. Cheltenham: Edward Elgar. Read More