Answer to Question #191044 in Microeconomics for chloe

Question

a) Outline the main factors that have led to the emergence of a monopoly.

b) Explain why a perfectly competitive firm is a `price-taker` while a monopoly firm ( a monopolist )

     will be a `price-maker`.                                   

Answer 1

a.

The reasons behind the emergence of monopoly are :

1. Government licensing : This implies that before entering into an industry, a firm is required to take permission from the government. Licensing is being used for ensuring minimum standards of competency. 
2. Patent Rights : Certain big private companies are being engaged in the activities of research and development.They tend to come up with new technologies or new products. As a reward for their investment and risk in research and government grants patent rights.
3. Cartel : Under cartel, some of the firms tend to retain their individual identities but in turn coordinate their policies of output and pricing for acting as a monopoly.
4. Control on raw materials : Monopoly also tends to arise due to sole ownership or control of certain essential raw materials being required in a particular industry.

b.

A perfectly competitive firm is in turn considered to be a price taker due to the pressure of competing firms forcing it for acceptance of the prevailing market equilibrium price.

If in a perfectly competitive market a firm tries to raise the price of its product by even so much as being a penny, it would in turn lose all of its sales to its competitors.

In case of monopoly, firm and industry are considered to be the same.Thus,a firm possesses complete control over the industry output.

As a result, monopolist is considered to be price-maker and in turn fixes its own price. It could influence the market price by changing of the supply of the product.