Question

1. Competition (40 points) a. Describe perfect competition, monopoly and oligopolies and the relationship between marginal costs, marginal revenue and the price levels at equilibrium within each type of these markets (Using graphs might be helpful). b. Under what conditions do oligopolies function like perfect competition or monopolies? Explain in detail. Can we ever observe perfectly competitive markets or tendency towards them in the real world? Why, why not? C.

Answer 1

Perfect competition:

Perfect competition is a market situation in which very large number of buyers and sellers operate freely and the commodity is sold at a uniform price. This is an extreme form of market which rarely exists in practice. It is a market structure where there is no rivalry among the firms.

The output sold under perfect competition will be homogeneous or identical. There will be no difference among the products. Their color, size, quality etc will be the same. If a producer fixes a price above the market price, he will lose his consumers. As the producer gets only normal profit he will not sell the product for a price less than the market price. Under perfect competition price of goods will always be equal to market price.At this price any quantity of a commodity will be available for sale and purchase in the market.Therefore the price of every unit of a product sold by the producer will be the same. The producer is ready to sell any quantity at market price and the consumer ready to buy at that price.

Oligopoly:

It is a form of imperfect competition. It is a market situation in which ther are a few firms that produce homogeneous or differentiated goods and compete with one another.Firms manufacturing car,motor cycle,mobile phone are examples of oligopoly firms.

Monopoly:

Monopoly is a market situation in which a single seller or firm controls the entire supply of a product which has no close substitute.

features: 1.single seller for a product

2. absence of substitute product

3.entry of new firms are denied

4. the monopolist has complete control over supply of the product

5. firm and industry are the same because there is only one firm in the monopoly market

Profit maximization is the main objective of every monopoly firm.The entire quantity produced is put up for sale without maintaining stocks.