Answer to Question #250577 in Microeconomics for Mendie

Question

1. Discuss the assumption of the following market structure:
i. perfect competitive market
ii. monopolistic market
iii. pure monopoly.

2. Examine the short-run profit maximization of a perfectly competitive market based on:

i. Total Revenue total cost approach
ii. Marginal Revenue marginal cost approach

3. Define the supply curve of a perfectly competitive firm and show how it is derived.

Answer 1

Number one

(i)

A perfectly competitive market has following assumptions:

Large Number of Buyers and Sellers:

In a perfectly competitive market there is an assumption that the Buyers and Sellers are many. Therefore, no single buyer or seller can affect the price.  A firm can enter into the market or exit the market without effecting the supply of goods in the market. A buyer can also enter into the market or exit from the market without affecting the demand of goods in the market. Its assumed that no individual buyer or seller can affect the price of good in the market

Homogeneous Products:

Under perfectly competitive market, all sellers sell homogeneous product. This situation allows the buyers to prefer the product of any seller in the market. Its assumed that the goods have same chemical and physical composition.

No Discrimination:

The third assumption of perfect competition is that buyers and sellers are buying and selling freely among themselves. It means that buyers and sellers are willing to deal openly with one another to buy and sell at the market price.

 Perfect Knowledge:

 It means that a large number of buyers and sellers in the market exactly know how much is the price of the commodity in different parts of the market.

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Free Entry or Exit of Firms:

 Firms can entry into or exit from the market at their own will. There is no let or hindrance on firms as far as their entry into or exit from the market. Legal or social restrictions on the firms do not exist in a perfectly competitive market. 

Profit Maximization:

The final assumption of perfect competition is that all firms have a common goal of maximizing their profit . Therefore, there is no social welfare of the general masses.

The assumption of monopolistic market

Freedom of entry 

Legal or social restrictions on the firms do not exist in monopolistic market. Any firm can set up business in this market or exit from the market at their own will.

Large number of firms 

The second assumption of monopolistic market is that it has large number of firms with each firm holding an insignificantly small share of the market.

Product differentiation 

Under monopolistic market, all sellers sell different product or service from its competitors. Product differentiation is done through creating different product brands .

Number two

(i)A perfectly competitive firm often sell as large a quantity as possible, provided it accepts the prevailing market price. Total revenue collected will increase as the firm sells more, depending on the price of the product and the number of units sold. If sales are high at a given price, then total revenue will increase. With the increase in price of the product per unit sold, there shall be an increase in total revenue

(ii)Marginal cost changes as the firm produces a greater quantity of output. At first, marginal cost decreases with additional output, but then it increases with additional output.

The profit-maximizing choice for a perfectly competitive firm occurs when level of output in marginal revenue is equal to marginal cost.  This is because the marginal revenue received by a perfectly competitive firm is equal to the price

Number three

The market supply curve is a collection of all the individual supply curves of the firms in the market and the curve will slope upwards from left to right, indicating that, as price rises, quantity supplied will increase, assuming no change in factor prices as the output of the market expands.