Perfect Competition - Case Study Example

Part one: perfect competition monopoly monopoly competition oligopoly organization example coca cola company Telecom New Zealand HP OPEC 2 good andservices drinks Telecommunication computers oil 3 price elasticity of demand elastic inelastic inelastic inelastic 4 economic profits no yes yes yes 5 barriers to entry no yes few yes 6 number of organizations many one many few The table above summarizes the various market structures, the first market analyzed is the perfect competition market structure where there are no barriers to entry and exit into an industry, this market structure is also characterized by many firms in the market and also many sellers finally the demand curve is elastic whereby an increase in the price will decrease the quantity demand and vice versa. The monopoly market structure is characterized by only one firm in an industry, there are barriers to entry and the firm realizes economic profits. The oligopoly market is characterized by only a few firms, a kinked demand curve and firms realize economic profits. Finally the monopoly competition has few barriers to entry, there are economic profits and only a few firms are in the industry. Part two: Summary of the simulation: 1. Advantages and limitations of supply and demand in simulation: There are advantages and disadvantages associated with the supply and demand curve in the simulation; we analyze the advantages and disadvantages of the curves separately as follows: Some of the advantages associated with the demand curve and supply curve is that they are straight lines drawn to estimate the changes in prices and quantity produced in the market, they help to clearly help understand the impact of changes in price on the supply and the demand in each industry, the other advantage is that both curves helps to estimate the price and the quantity produced in each market. There are disadvantages associated with the demand and supply curve, the first disadvantage is that the curves do not clearly indicate the price elasticity of demand or the price elasticity of supply in the different market structures; all the demand and supply curves present assume elastic demand curves. The other disadvantage is that the demand curves assume that an increase in price will definitely result into a decline in the quantity demanded, or an increase in price will increase the quantity supplied, the curves also assume that the relationship is linear whereas in the real market the relationship is not exactly linear. The final disadvantage is that the curves are estimates and they are based on figures that are not from real markets; due to this therefore estimation using these curves will not clearly indicate the changes that would occur in the real market. 2. I choose the oil industry and in this industry concentrate on the OPEC organization which comprises of oil producing countries. This organization forms an oligopolistic market structure in that there are a few organizations in the industry, due to high demand of oil all over the world the organization is able to control oil prices and therefore the members earn economic profits because oil is an input in almost all industry either directly or indirectly, for this reason therefore the demand for their products is inelastic and a rise in the price will result into slight decline in the demand. The structure of this organization is effectively managed in that almost all oil producing countries are members of OPEC and therefore they have the power to set prices in the market, there are minimal barriers to entry and an organization qualifies to be a member if it has the potential to produce oil in the region. 3. This section analysis how the organizations in each market structure maximize their profits Perfect competition: In a perfect competition market there are many sellers and buyers and there are no barriers to entry into the industry, profits are maximized where the marginal cost curve intersects with the marginal revenue curve, this is the optimal position for maximum profits, this point will determine the optimal quantity to produce and the optimal price to charge for goods and services. Therefore a firm in a perfect competition structure will maximize profits where the marginal curve cuts the marginal revenue curve. Monopoly: A monopoly market structure if that which only one firm is in an industry, the firm has the power to make prices and also determines the quantity to produce, the monopoly will maximize profits where the marginal cost curve cuts the marginal revenue curve, however this point only depict the optimal quantity to produce, the price is much higher than the point where the marginal cost curve cuts the marginal revenue curve, the price will be determined as follows: The monopolist will charge a price p0 in order to gain maximum profits, when the marginal cost is greater than the marginal revenue then the monopoly will reduce production to increase profits, when the marginal cost is less than the marginal revenue then the monopoly will increase production to increase profits, for this reason therefore the monopoly will realize economic profits by producing less and charging a higher price. Oligopoly: This kind of market comprises of a few firms in the industry, the firms realize economic profits, firms in this kind of market will maximize profits by producing at the point where the marginal revenue curve equals marginal costs, however this point will only determine the optimal production level and a firm will increase prices in order to increase profits. Monopoly competition: A monopolistic competition market structure is that which only a few firm are in an industry, the firm has the power to make prices and also determines the quantity to produce, the monopoly will maximize profits where the marginal cost curve cuts the marginal revenue curve, however this point only depict the optimal quantity to produce, the price is much higher than the point where the marginal cost curve cuts the marginal revenue curve, there are barriers to entry and for this reason the firms have are price makers and not price takers. References: Economics for business II (2008) Market structures Simulation, retrieved from Read More