Chapter 10

Perfect Competition & Monopoly

 

Monopoly – is a form of market organization in which there is only one seller of a product. 

·        Single Seller – there is a single seller of the particular product

Local Monopolies – such as the electric company, water company etc.. that exist

·        Unique Product – the product of a monopolist is unique.  There are usually no products that are directly comparable.  In the case of electricity there is no substitute for FPL. 

·        Very Difficult to Leave the Industry – In a monopoly, the entry or the ability of firms to leave is very difficult. 

·        Usually there are very high costs in obtaining machines etc. used in the production process

·        Natural Monopolies – is a situation in which competition is not practical such as is the situation with the electric company.  In this situation it is more efficient for one firm to operate than it is for several firms to do so.

·        Patents – in some industries, competition can be prevented through the use of a patent.  A patent is a legal protection for the inventor of a product or process that gives that person or company the sole right to produce the product or use the process for up to 17 years.

·        Government Regulations – the government regulates the industries in which there are monopolies.  Sometimes it is believed that the public is served best by one firm, therefore the government does not allow any new entrants, and it does not allow the monopoly to leave the business. 

 

·        Complete information about the market – since the monopoly is the only firm providing a particular product, they can be considered experts.  Monopolists know as much as can be known about the market. 

 

·        Great Deal of Price Control – in a monopoly, the firm has a great deal of control over price, since the monopolists is the only available seller of the product.   Therefore, most monopolies are regulated by the government to ensure that consumers are treated fairly. 

 

Producing as a Monopoly

Monopolists are called price setters.  This is due to the fact that they determine the price to be charged to consumers.

 

Demand Curves for a Monopolist

Since the monopolists is the only firm selling the product in a given market, it stands to reason that the demand curve for the output of a monopolist equals the market demand for the curve of a product.

 

Therefore, monopolists demand, must be the same as the market demand.

 

Types of Business Organization

q       Sole Proprietors

q       Partnerships

q       Corporations

 

In order to understand the workings of a market economy, you need to understand how firms are organized with respect to each other:

q       Perfect Competition

q       Monopoly

q       Monopolistic Competition

q       Oligopolies

 

The following are the characteristics that can be used to differentiate between the forms of market organization.

q       Number of Firms (many or a few)

q       Type of product being sold (similar or differentiated)

q       Ease of entering or leaving the business (start and leave)

q       Amount of information about the market (knowledge) and;

q       The degree of price control (price takers or setters)

 

I.                    Perfect Competition – is a situation where a great deal of firms produce a “homogeneous” product.

 

A.     Number of Firms – many sellers

B.      Type of Product – homogeneous product which means that “each firm in a perfectly competitive market produces a product that is just like the output of other firms in that market” Examples can include: wheat.  These products vary very little from producer to producer.  In this case, buyers do not care from which firm they buy.

C.     Ease of entering or leaving the business – firms have complete freedom for new forms to enter the industry as well as for exiting. 

D.     Amount of Information about the market – information flows freely and completely among participants in the market.  Each seller knows the prices others charge for products as well as prices paid for inputs. 

E.      Degree of Price Control – firms have no control over price.  Producers in these industries, sell at the market price.  They cannot sell anything at a higher price and have no reason to sell at a lower price.  These firms are PRICE TAKERS.

 

II.  Monopoly – is a form of market organization in which there is only one seller of a product. 

·        Number of Sellers - single seller there is a single seller of the particular product

Local Monopolies – such as the electric company, water company etc.. that exist

·        Type of Product Sold –is a unique product.  There are usually no products that are directly comparable.  In the case of electricity there is no substitute for FPL. 

·        Ease of Entering or Leaving the Industry - very difficult to leave the industry.  In a monopoly, the entry or the ability of firms to leave is very difficult. 

·        Usually there are very high costs in obtaining machines etc. used in the production process

·        Natural Monopolies – is a situation in which competition is not practical such as is the situation with the electric company.  In this situation it is more efficient for one firm to operate than it is for several firms to do so.

·        Patents – in some industries, competition can be prevented through the use of a patent.  A patent is a legal protection for the inventor of a product or process that gives that person or company the sole right to produce the product or use the process for up to 17 years.

·        Government Regulations – the government regulates the industries in which there are monopolies.  Sometimes it is believed that the public is served best by one firm, therefore the government does not allow any new entrants, and it does not allow the monopoly to leave the business. 

 

·        Amount of Information about the Market – these firms have complete information about the market  since the monopoly is the only firm providing a particular product, they can be considered experts.  Monopolists know as much as can be known about the market. 

 

Degree of Price Control – these firms have a great deal of price control.  In a monopoly, the firm has a great deal of control over price, since the monopolists is the only available seller of the product.   Therefore, most monopolies are regulated by the government to ensure that consumers are treated fairly.  PRICE SETTERS.