Answer to Question #151904 in Microeconomics for Rachel

Question

(a) Explain any THREE (3) characteristics of a firm in a perfectly competitive industry.
(b) Discuss any FOUR (4) barriers to entry imposed by a monopolist.
(c) Distinguish between Positive Externalities and Negative Externalities. Provide ONE (1)
example for each.

Answer 1

a) I) large number of buyers and sellers - number must be so large that none of them individually is in a position to influence the price and output of the industry as a whole.

II) Free entry and exit of firms - firms should be free to enter or leave the firms, incase there is profit firm will enter in business and if there is loss firm will leave the business.

III) Perfect knowledge of the market - buyers and sellers must possess complete knowledge about the prices at which goods are being bought and sold and of the prices at which others are prepared to buy and sell.

b) These barriers  include: economies of scale that lead to natural monopoly ; control of a physical resource; legal restrictions on competition and patent, trademark and copyright protection.

c) Positive externalities refer to the benefits enjoyed by people outside the marketplace due to a firm's actions but for which they do not pay any amount. On the other hand, negative externalities are the negative consequences faced by outsiders due a firm's actions for which it is not charged anything by the market.

example of negative externality is pollution, example of positive externality is when a farmer who grows apple trees provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey.