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Running head: BUSINESS ECONOMICSBusiness EconomicsName of the Student:Name of the University:Author’s Note:Course ID:
1BUSINESS ECONOMICSIn economic sense, the market depicts the relation of exchange between the purchasersand sellers. The particular market category is reliant on the various market aspects like thepresence of number of buyers and sellers in the market, the kind of products sold in the marketand the overall market size (Akram, 2014). The most prevalent market categorisation depends onthe sellers and purchasers in the market. The effective apportionment of resources is reliant onthe particular market structure. Hence, there would be efficiency in apportionment with the fallin market power. In this context, the market power is greatest in case of a seller operating in themonopoly market, which could be featured with the help of many purchasers and a sole seller.Thus, a monopoly market in general sense is inefficient in contrast to competitive market. An associated form of pure monopoly is identified as the natural monopoly. The primarydifference between these two forms is that in presence of a pure monopolist, competition ishighly preferred to a sole seller. However, in the market of natural monopoly, the presence of asingle seller entails greater efficacy (Anderson et al., 2014).The main reason behind this is thatthe natural monopolist is involved in operating at average cost curve point for enjoying theoverall scale benefits. In the market of natural monopoly, the realisation for governmentregulation is needed for assuring an effective pricing. Explaining why and how the government might want to regulate the price setting of anatural monopoly:In the standard market of monopoly, the equilibrium condition of quantity and price isobtained from the condition of profit maximisation. The monopolist controls the price in themonopoly market. The point in which the sales from selling marginal quantity align with theproduction cost of marginal quantity is taken into account as the profit maximising point. The
2BUSINESS ECONOMICSmonopoly market price is above the marginal cost generating income for the monopolist. Thefollowing figure depicts the monopoly market condition, in which the shaded region depicts themonopolist’s profit:Figure 1: Condition of the monopoly market(Source: Biondi & Zambon, 2013)The competitive market mechanism is not identical. The condition related to free marketsupply demand ascertains output and price in the competitive market. Both the marginal benefitcurve and demand curve are identical with the market supply curve. Hence, aligning supply anddemand reveals parity between marginal social cost and marginal social benefit; thus, denotingits social efficiency (Bottazzi, Secchi & Tamagni, 2014). The situation of the market incompetition and monopoly has been presented in the below-stated figure:
3BUSINESS ECONOMICSFigure 2: Comparison between monopoly market and competitive market(Source: Cucculelli, & Bettinelli, 2015)The marginal social cost curve or supply curve is the monopolist’s marginal cost curve.Pm and Qm represent price and quantity in the monopoly market, while in case of competitivemarket, they are Pc and Qc. From the above diagram, it is evident that Pm is more than Pc andsimilar is the case in quantity as well. The societal loss in relation to monopolist operations andresulting low output along with greater price is depicted as the societal deadweight loss. From the previous discussion, it is inherent that the position of a sole seller is notdesirable from the social perspective in the monopoly market. The formation of barriers to entryhelps in retaining the sole supplier status. In the natural monopoly market, the natural barrierprevents the entry of new sellers into the same (Dostál, 2013). The natural barriers denote theconditions, in which the other organisations do not reveal interest in entering the market due togreater fixed cost. The government often develops regulatory entry barriers for retaining themarket efficacy with a sole supplier.
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