ECON20039 Perfect Competition and Monopolistic Competition : Assignment
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Economics for Managers (ECON20039)
Added on 2020-05-28
ECON20039 Perfect Competition and Monopolistic Competition : Assignment
Economics for Managers (ECON20039)
Added on 2020-05-28
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Running Head: ECONOMICS FOR MANAGERS Economics for ManagersName of the StudentName of the UniversityAuthor note
ECONOMICS FOR MANAGERS 1Table of ContentsAnswer a..........................................................................................................................................2Basic features of perfect competition and monopolistic competition.........................................2Equilibrium under perfectly competitive market.........................................................................3Equilibrium under monopolistically competitive market............................................................7Productive and Allocative efficiency...........................................................................................9Answer b........................................................................................................................................11Features of Oligopoly market....................................................................................................11Australian Banking Industry and Oligopoly:.............................................................................12Answer c:.......................................................................................................................................15Crisis of housing affordability in Australia:..............................................................................15Demand side factors impacting housing affordability:..............................................................16Solution to the housing crisis:....................................................................................................17Probable supply side solutions:.................................................................................................18References......................................................................................................................................20
ECONOMICS FOR MANAGERS 2Answer a Market signifies an ideal place for exchanging goods and services between consumer andproducers. Consumers come in the market place with demand of certain goods. Based onconsumers demand sellers or producers supply goods. Transaction of goods occur when interestof buyers coincides with that of sellers’ interest. Different form of market exists each havingtheir own characteristics. There are different means of classifying market. Number of marketparticipants is an important attribute of market differentiation (Zinn et al., 2016). The two maincategories of market are perfectly competitive market and imperfectly competitive market. Underimperfect competition, there are monopoly, oligopoly and monopolistic competition.Monopolistically competitive market and perfect competition are closely related with each other.The two markets though have various similarities but also have distinguishing features. Thesimilar and discriminatory features of these two markets are as follows.Basic features of perfect competition and monopolistic competition Buyers and sellers: Number of buyers and sellers are basicmeans of market classification.Under perfect competition, there are several buyers and sellers in the marketplace. The presenceof many buyers strengthens competition among the sellers. There are so many sellers in themarket that every seller has opportunity to capture only a small share of the market. Similar isthe case for monopolistically competitive market (Frank, 2014). This form of market as well hasnumerous sellers. Market power: In the competitive market, several sellers compete in the market place. As eachseller has only a small share in the market, there does not exist any market power in the hands ofsellers. As the sellers do not have any market power,they sell products at price determined in the
ECONOMICS FOR MANAGERS 3market. Sellers are price taker in perfectly competitive market. In monopolistic competition also,there are many sellers causing a significant reduction in market power. However, as sellers sell adifferentiated product they enjoy some market using, which they decide price of their own brand.Type of good: The perfectly competing sellers sell an identical or homogenous product. Assimilar product is available to every seller if any one of them charges a high price, buyersautomatically shift their demand to other seller. With monopolistic competition, sellers thoughhave similar type of product by nature, but they make it different with differentiation mechanism(Mankiw, 2016). A differentiated product is sold in monopolistically competitive market incontrast to identical product under perfect competition.Advertising: As all the goods are identical or homogenous, there is no need of advertising inperfectly competitive market. In the monopolistically competitive market, since differentiatedproduct is sold sellers spends a significantly large amount on advertising to promote their ownproducts. Free entry and exit: In both the market, there is little or no barriers to entry or exist the market.When existing sellers enjoy significant amount of profit then new firms enter the market. Intimes of economic loss, firms leave the industry (Cowen & Tabarrok, 2015).Equilibrium under perfectly competitive marketShort run equilibrium In production operation, short run defines a period where firms cannot fully haveexpanded because of constraint in input. Sellers are price takers under perfectly competitivemarket. Because of fixed price, average and marginal revenue in the perfectly competitivemarket are both equal to price. The demand curve and marginal revenue curve are horizontal
ECONOMICS FOR MANAGERS 4straight line (Baumol & Blinder, 2015). Profit maximization of firms occur at the point wheremarginal revenue equals with the marginal cost. Under perfect competition, price coincides withmarginal revenue and price is set at the level equal to the marginal cost. This is the first ordercondition for profit maximization in the short run. The second order condition that needs to befulfilled is that slope of marginal revenue is less than the slope of marginal cost.In the short run, competitive firms have opportunities to enjoy an above normal profit.When price is more than average cost then total revenue exceeds total cost giving firms asupernormal profit. Total revenue fell short of total cost when price goes below the average cost.Firms in the perfectly competitive market thus in shirt run can enjoy either profit or may sufferfrom a loss (Stein & Allione, 2014). The various short run situation in a perfectly competitivemarket is shown in the following figures. Figure 1: Short run profit in competitive market (Source: as created by Author)
ECONOMICS FOR MANAGERS 5Figure 2: Short run normal profit in competitive market (Source: as created by Author)Figure 3: Short run loss in competitive market (Source: as created by Author)
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