Answer to Question #313818 in Economics of Enterprise for heyy

Question

1. Identify the type of market structure which you think operates in your selected industry. For example, is it ‘perfectly competitive’, ‘monopoly’, ‘monopolistic’ or ‘oligopolistic’. You should justify your answer by explaining how closely the industry operates in practice to the economic model of that market structure. Of KFC

       (9 marks)

Answer 1

The perfectly competitive industry has four characteristics:

(1) Homogenous product,

(2) Large number of buyers and sellers (numerous firms),

(3) Freedom of entry and exit, and

(4) Perfect information.

The possibility of entry and exit of firms occurs in the long run, since the number of firms is fixed in the short run.

An equilibrium is defined as a point where there is no tendency to change. The concept of equilibrium can be extended to include the short run and long run.

Short Run Equilibrium = A point from which there is no tendency to change (a steady state), and a fixed number of firms.

Long Run Equilibrium = A point from which there is no tendency to change (a steady state), and entry and exit of firms.

In the short run, the number of firms is fixed, whereas in the long run, entry and exit of firms is possible, based on profit conditions. We will compare the short and long run for a competitive firm in Figure 5.1. The two panels in Figure 5.1 are for the firm (left) and industry (right), with vastly different units. This is emphasized by using “q” for the firm’s output level, and “Q” for the industry output level. The graph shows both short run and long run equilibria for a perfectly competitive firm and industry. In short run equilibrium, the firms faces a high price (P_SR), produces quantity Q_SR at P_SR = MC, and earns positive profits π_SR.