Question

Ceteris paribus, how do the demand elasticities of perfectly competitive firms compare with imperfectly competitive firms?

If you ran a business, would you prefer to be a monopoly or a perfectly competitive firm? Why?

Finally, and only tangentially related, are monopolies guaranteed a profit? Why or why not?

Answer 1

Perfectly competitive firms are those which produce identical or homogenous goods without having any barriers to entry and exit. There are large number of both- sellers and buyers having 'perfect knowledge.' On the other hand, Imperfectly Competitive Markets are monopoly, oligopoly and monopolitic markets. They produce heterogenous or differentiated products.

In case of Perfectly competitive markets, the demand elatsicity is perfectly elastic. This is due to the fact that at a prevailing price, the seller can sell as many units of its goods as it wants. Also, since the goods in this market are perfect subsititues of each other, if a firm tries to increase its price, its demand will become 0 as people will shift to other firm's same product.

.In case of Imperfect competition, the demand elasticity is less elastic, because the goods are differentiated, firms have the power to charge the price they want without all of their buyers shifting to other firms.

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If running a business, monopoly firm is preferable because-

1) As a seller, I can decide what price I want to charge for my products.

2) I can create barriers to entry and exit for other firms.

3) I will have the market control, i.e. I will be dominating the market for the product I am selling, hence, a set consumer base.

4).Demand of my goods will be less elastic.

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Monopolies guarentee profits only when the price charged for the product is greater than the average total cost. When Marginal Revenue = Marginal Cost, then the monoly firm will maximise its profit. If this is not the case, the monopoly might end up losing its money.

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