Topic area 4. Market structures A. What are the key characteristics of a market
ID: 1153751 • Letter: T
Question
Topic area 4. Market structures
A. What are the key characteristics of a market in perfect competition and explain how economists argue that firms in perfectly competitive markets that remain for the long-run produce the most efficient economic outcome for society in terms of prices and business efficiency?
B. Monopoly markets can be viewed as a type of market failure in that this market structure fails to allocate resources efficiently in terms of the prices paid and the quantities exchanged. Explain how a firm operating in a monopoly market in the long-run makes super-normal profit at consumers’ expense? What can be done to moderate this inefficient outcome and what benefits do monopoly firms bring to an economy that justify their continued existence?
Explanation / Answer
a)
Key Features of Perfect Competition
I) each firm appreciates just a little piece of the overall industry - firms are value takers
II) Free passage and exit
III) Homogenous items
IV) Firms confront a similar factor cost
Effectiveness: a)
Competitive markets appreciate both designate and gainful proficiency.
The condition for dispense productivity is that value/customer's ability to pay is precisely equivalent to the negligible cost of creation. In focused markets, at harmony, cost dependably rises to the peripheral cost of creation. Along these lines, splendidly focused markets appreciate assign productivity both in the short and long run.
For beneficial effectiveness, the yield ought to be delivered at the most reduced conceivable cost of generation. At the end of the day, creation would be at the most reduced purpose of the normal aggregate cost bend where normal cost breaks even with minor cost. Under flawless rivalry, over the long haul, firms create at the point where normal cost rises to minimal cost. In this way, over the long haul impeccably aggressive market appreciates beneficial effectiveness.
b)
Total Surplus = Consumer Surplus + Producer Surplus
Consumer surplus can be defined as the monetary gain by consumers owing to the difference between their willingness to pay and actual price charged by producer/seller. And producer surplus can be defined the difference between what producers are willing and able to supply a good for and the price they actually receive for the good.
In monopoly markets, firms charge a price greater the cost of production that the consumer surplus is diminished, while the producer enjoys greater monetary gain. Therefore, supernormal profits reflect a scenario where the producers benefit at consumer's expense.
Excesses of monopoly can be minimized via government regulation. Even if the situation would be better served by a monopoly, government can take steps to limit the prices, ensure the quality of service/output produced.
Monopoly firms are preferable in that they have an incentive as well as requisite financial resources to take risk, fund research and development. This in turn would enable firms to provide improved products. For example: patents and associated monopoly power encourage firms to undertake costly research and development since the patents provide firms a guaranteed means of recouping their costs.