Question

Students must prepare a three to four page typewritten double-spaced paper on a current macroeconomic topic that is pertinent to class material. This can be chosen from the textbook, newspapers, magazines, or current economics periodicals. Students will be expected to analyze and evaluate the issue or topic and provide recommendations. Here are some sample topics: Countries that do not believe in comparative advantage How do people respond to economic incentives? Stories of positive or negative externalities What's the best healthcare system in the world? Examples of behavioral economics Differences between monopolies, monopolistic competition, oligopolies, and the perfectly competitive market Income inequality throughout the world

Answer 1

Background Information

The markets in an economy are categorized on the basis of the degree of competition among producers operating in a particular industry. The degree of competition determines how much freedom and power an individual producer enjoys in determining the price. As a result, the more the degree of competition in a particular industry, the less influence particular producer has on the price.

Markets can be divided into Perfect Competition and Imperfect competition. Imperfect competition can further be divided into monopoly, oligopoly and monopolistic competition.

Here in this study, all the four forms of competition can be compared on the basis of various parameters: number of sellers and buyers, nature of products, knowledge about market and technology, freedom of entry and exit.

1. Number of sellers and buyers:

In perfect competition, the number of sellers is so large that output produced by an individual seller has an insignificant proportion of the total output of the industry. Consequently, any change in the output of individual producer has a negligible impact on total output of Industry.

In monopoly, there is only one producer of a product. This is due to some natural conditions prevailing in the market or due to some legal restrictions like patents, copyrights etc. So monopolist is also called price maker.

Oligopoly is that form of market where there are few large firms controlling the bulk of output of Industry. Since there are few large firms, each big firm has some influence on the price of the product the firm produces.

In Monopolistic Competition, there are a large number of sellers in the sense that no individual seller is big enough to influence the market on its own.

2. Homogeneous Products or differentiated products

In perfect competition products are homogeneous i.e. they are same in colour, size, weight and other parameters.

In monopoly, since there is only one producer there is no question of homogeneous or differentiated products.

In Oligopoly, the products are generally close substitutes.

In monopolistic competition, products are close substitutes.

3. Barriers to entry and exit

In perfect competition, there are no barriers to entry and exit of firms.

In Monopoly, there are barriers to entry in the form of either Government laws or patents and copyrights

In Oligopoly, there are barriers to entry of the firms. One such barrier is that huge capital is required to enter the industry.

In Monopolistic Competition, there are no barriers to entry which means that there are neither supernormal profits nor losses in the long run.

4. Real life example

Perfect Competition: The market for Foreign exchange resembles perfect competition but not a pure form of Perfect competition.

Monopoly: Utility services (Electricity) provided by Government in some localities is an example of monopoly.

Oligopoly: Automobile manufacturing Industry is an example of an oligopoly- manufacturers in the United States being Chrysler, Ford (F), and GMC.

Monopolistic Competition: Soap Industry is an example of Monopolistic competition.