NATIONAL UNIVERSITY OF MODREN LANGUAGES

(NUML)

Name Zain Iqbal
Class BBA (II- C)
Subject Economics
Roll No. 2711
Topics Perfectly Competitive Markets
Imperfectly Competitive Market
Similarities and Dissimilarities between Monopolies
Competition and Perfect Competition



Main Features of Perfect Competition
The following are the characteristics or main features of perfect competition:-
1. Many Sellers:
In this market, there are many sellers who form total of market supply. Individually,
seller is a firm and collectively, it is an industry. In perfect competition, price of
commodity is decided by market forces of demand and supply. i.e. buyers and sellers
collectively. Here, no individual seller is in a position to change the price by controlling
supply. Because individual seller's individual supply is a very small part of total supply. If
that seller alone raises the price, his product will become costlier than other and
automatically he will be out of market. Hence, that seller has to accept the price which
is decided by market forces of demand and supply. This ensures single price in the
market and in this way, seller becomes price taker and not price maker.

2. Many Buyers:

Individual buyer cannot control the price by changing or controlling the demand.
Because individual buyer's individual demand is a very small part of total demand or
market demand. Every buyer has to accept the price decided by market forces of
demand and supply. In this way, all buyers are price takers and not price makers. This
also ensures existence of single price in market.
3. Homogenous Product:
In this case, all sellers produce homogeneous i.e. perfectly identical products. All
products are perfectly same in terms of size, shape, taste, color, ingredients, quality,
trademarks etc. This ensures the existence of single price in the market.
4. Zero Advertisement Cost:
Since all products are identical in features like quality, taste, design etc., there is no
scope for product differentiation. So advertisement cost is nil.
5. Free Entry and Exit:
There are no restrictions on entry and exit of firms. This feature ensures existence of
normal profit in perfect competition. When profit is more, new firms enter the market
and this leads to competition. Entry of new firms competing with each other results into
increase in supply and fall in price. So, this reduces profit from abnormal to normal
level. When profit is below normal level some firms may exit the market. This leads to
fall in supply. So remaining firms raise their prices and their profits go up. So again this
ensures normal level of profit.
6. Perfect Knowledge:
On the front of both, buyers and sellers, perfect knowledge regarding market and
pricing conditions is expected. So, no buyer will pay price higher than market price and
no seller will charge lower price than market price.
7. Perfect Mobility of Factors:
This feature is essential to keep supply at par with demand. If all factors are easily
mobile (moveable) from one line of production to another, then it becomes easy to
adjust supply as per demand.
Whenever demand is more additional factors should be moved into industry to increase
supply and vice versa. In this way, with the help of stable demand and supply, we can
maintain single price in the Market.
8. No Government Intervention:
Since market has been controlled by the forces of demand and supply, there is no
government intervention in the form of taxes, subsidies, licensing policy, control over
the supply of raw materials, etc.
9. No Transport Cost:
It is assumed that buyers and sellers are close to market, so there is no transport cost.
This ensures existence of single price in market.

IMPERFECT COMPITITION


Prevails in a market where individual sellers have some degree of control over the price of their
output.

Monopoly:

It is the market structure in which only one producer or seller exists for a product that has no
close substitutes.

Characteristics of monopolies:


There is only one firm which supply the entire market and many buyers & consumers


The firm sells a unique product, which has no close substitutes.


The firm has market power (that is it can control it's price)


Entry into the market is restricted, e.g. due to high costs and some special barriers to entry.
A social, political or economic impediment that prevent firms from entering a market.

These barriers to entry are:


High cost to enter a market that can support only one business, e.g. the supply of water
and electricity etc.


A business may have exclusive control of a natural resource. Other producers cannot
compete, because they don't have that resource at their disposal. E.g. De Beers controls a
large part of all diamond production, and this create a barrier to entry for other firms.


A business may have copyright or patent right on its product, thus making it illegal for
other producer to duplicate the product.


A monopoly may be created by the state making it legal.


A well-known and popular trademark could ensure consumer loyalty, e.g. Pepsi.





IMPERFECT MARKET

Type of market in which information is not quickly disclosed and where the matching of buyers
and sellers isn't immediate. Generally speaking, it is any market that does not adhere rigidly to
perfect information flow and provide instantly available buyers and sellers. The perfect market,
as defined in economic textbooks, is not a truly achievable goal, but is still a beneficial model
that provides a starting point for observation of our present market status. Practically, the
imperfect market is the only kind that really exists. Even in the United States, the most
advanced financial market in the world, there are still numerous cases of price corruption,
improperly disseminated information and other market inefficiencies.




PERFECT MARKET
A purely competitive (price taker) market exists when the following conditions occur:
Low entry and exit barriers - there are no restraints on firms entering or exiting the
market.
Homogeneity of products - buyers can purchase the good from any seller and receive
the same good.
Perfect knowledge about product quality, price, and cost.
No single buyer or seller is large enough to influence the market price.

Sellers must take the existing market price; if they set a price above the market price, no
one will buy their product because potential buyers simply will go to other suppliers. Setting
a price below the market price does not make any sense because the firm can sell as much
as it wants to at the market price; selling below the market price will just reduce profits.
Because sellers must take the current market price a purely competitive market is also
called a "price takers" market.

The firm can sell as much as it can produce at the existing market price, so demand is not a
constraint for the firm. Revenue will be simply the market price multiplied by quantity
produced.

Maximizing Profit in Perfect Competition:

A price taker can sell as much as it can produce at the existing market price.
So total revenue (TR) will be simply P Q, where P = price and Q = quantity sold.
Marginal revenue (MR), the increase in total revenue for production of one additional unit, will always
be equal to the market price for a price taker.
If the market price of a good is $15, and a firm produces 10 units of a good per day, then its total
revenue for the day will be $15 10 = $150. The marginal revenue associated with producing an
eleventh unit per day would be the market price, $15; total revenue per day would increase from $150
to $165 (11 $15).
Marginal costs will vary, depending upon the quantity produced. We would expect the firm to increase
input up to the point where marginal cost is equal to the market price. In the short run, a firm will
produce as long as its average variable costs do not exceed the market price. If the market price is less
than the firm's total average cost, but greater than its average variable cost, then the firm will still
operate in the short run. Its losses will be lowered by producing, since nothing can be done about fixed
costs in the short run. Over the long run, the firm will need to cover all of it costs if it is to keep on
producing. If the market price at least covers the firm's variable costs, it may make sense to keep on
operating. Any price in excess of the average variable cost will at least help to cover the fixed cost.
Unless the firm decides to completely leave the business, it will come out ahead by continuing to
operate.

If the market price is below the firm's average variable cost, it will not make sense for the firm to
operate as it will lose even more money. If the firm believes that business conditions will improve, it will
temporarily shut down. Seasonal businesses such as ski resorts or restaurants located by vacation areas
will shut down temporarily at certain times. Manufacturers temporarily might shut down a factory and
plan to reopen the factory when business conditions improve.


PROFIT IN LONG RUN:

Long run is the period of time in which all factors of productions can be increased. All costs
become variable in long run. As far as profit is concerned in long run the profit is abnormal
because all the factors of productions can be increased and we can get more profit than the
proportional change in the input.


FRANCHISE:

A type of license that a party (franchisee) acquires to allow them to have access to a business's
(the franchisor) proprietary knowledge, processes and trademarks in order to allow the party to
sell a product or provide a service under the business's name. In exchange for gaining
the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing
fees. Franchises are a very popular method for people to start a business, especially for those who wish
to operate in a highly competitive industry like the fast-food industry. One of the biggest advantages of
purchasing a franchise is that you have access to an established company's brand name; meaning that
you do not need to spend further resources to get your name and product out to customers.