Question

Assume that in the independent nation of Qari sugar production is controlled by a sugar monopoly, SugarCo, which earns economic profits. There are well over a million buyers of sugar in Qari but only one seller of sugar. Imports of sugar are forbidden.

a. In what type of market structure does SugarCo compete? List and briefly explain the characteristics of this market structure.

b. Draw a graph that shows the determination of the profit maximizing price and quantity of sugar in SugarCo.

· Label the profit maximizing price as "Ppm" and the quantity produced as "Qpm."

· Shade in the area of economic profits.

· Outline or shade in the deadweight loss.

c. Neighboring nation Nari now invades Qari and topples its government. SugarCo is destroyed and the sugar market is broken into hundreds of competing firms, all selling an identical product. In what type of market structure do these new firms now compete? List and briefly explain the characteristics of this new market type.

d. How will the price and quantity sold in this new market (part c) differ from the price and quantity you determined in part b, above? Redraw the graph from part b but show the price and quantity from part b and the price and quantity from part c.

e. SugarCo was the sole employer of sugar workers. What will happen to the wages of sugar workers once the sugar industry becomes competitive?

Answer 1

a) SugarCo has a monopoly over the Market. A market structure in which there is a single seller is called a monopoly. Its features are as follows:

1. Single seller and a large number of buyers: There is only one seller of good in the market. Although there are a lot of buyers

2. No close substitutes: It means the good sold has no close substitutes available in the market and therefore buyers are required to purchase that only.

3. Price maker: The firm/ seller can decide the price it wants to sell goods. However, it can't control price and output both. Therefore they can't charge an unrealistically high price and demand Curve is downward sloping.

4) Restriction on the entry of Firms: There are legal, commercial, natural or technological barriers for other firms to enter. Single firm exercises full control over the market.

5) Price Discrimination: The practice of charging different price from different consumers is called Price Discrimination. It is of three types: First degree Price Discrimination, Second degree Price Discrimination & Third-degree Price Discrimination.

b) c) Now the firms are competing in Perfect competition. Its features are as follows:

1) Large number of buyers and sellers : It means unlike monopoly ( Imperfect Market case) , there are a large number of buyers and sellers of homogeneous good in the market.

2) No restriction on entry or exit: All the firms are free to enter or exit the market as per their choice. There are no entry barriers.

3) Price taker: Now a single seller cannot determine the market price. It is determined by the total demand and supply in the market. Firms have to accept that price.

4) Homogeneous goods: All the products manufactured by different firms are homogeneous in nature. It means they are identical in shape, colour, size etc.

5) Perfect knowledge: Both buyers and sellers have perfect information about the market.  

d) Perfect Competition caseComparison