Topic 1: Perfectly Competitive Market Structure

Agricultural markets such as fruits and vegetable supply stores are some of the industries that come close to a perfectly competitive market structure. The agricultural market has many buyers and several farmers selling identical products such as fruits, vegetables, and herbs. Both buyers and sellers have knowledge about the market prices (Mankiw, 2009). It is easy to find the prices of the goods in the market because they are all about the same. No person has control over the prices of fruits, vegetable, and herbs in the market. All the agricultural products are homogeneous. Since customers have knowledge about the availability of the agricultural products, there is no need for advertisement. Some farmers sell their produce from the farms; thus, there is no transport cost incurred.

The demand curve for firms in a perfectly competitive market is perfectly elastic. All firms in the industry are price takers. Therefore, in the situation when there is an increase in the demand for the product, individual firms will respond by collectively increasing their prices. If the market demand decreases, the firms will lower their prices. Since all firms sell fruits, vegetables, and herbs, the customer would not be able to differentiate the firm the products came from.

In a perfectly competitive market structure, the market forces of demand and supply determine the prices of the goods. Buyers and sellers are price takers (Mankiw, 2009). Buyers represent the demand side while sellers represent the supply side. A rational buyer will aim at maximizing his/her satisfaction by purchasing more goods at lower prices and less at higher prices. On the other hand, a rational seller will aim at maximizing his/her profits by selling more products at higher prices and less at lower prices. At equilibrium price and quantity, the buyer would be willing to buy a particular quantity of good and the seller would be willing to sell the same quantity to the buyer.

Advertising does not have benefits to the individual firm. It would be a waste of resources. Customers have enough knowledge about the products in the market, and advertisements would not bring any improvement in the customers’ perception about the products.

Topic 2: Monopoly Market Structure

A monopoly will maximize profit where the marginal revenue equals the marginal cost. Since it has a downward demand curve, the marginal revenue will be less than the price. The difference between the perfectly competitive firm and a monopoly is that a competitive firm has a flat demand curve. With a perfectly elastic demand curve, the firm can decide to sell as much at it wants at the market price. Perfectly competitive markets choose each of their output levels to maximize profit. Their objective it to calculate the optimal level of output whereby the marginal cost (MC) = market prices (P) (Meacher, 2009). The firms maximize profit at the point where marginal cost intersects the marginal revenue or price. Conversely, in the case of a monopoly firm, it must accept a lower price if it wants to sell more output.

A monopoly firm creates a deadweight loss because it restricts the supply of goods and services below the socially efficient quantity. Similarly, the monopoly firm creates inefficiency by setting a price above the marginal cost (Meacher, 2009). The market will experience lost gains from buyers who were willing to pay above the marginal cost but below the monopoly price.

The reason a monopoly might decide to increase production and lower prices to earn acceptable profit rather than to maximize profits is to gain a higher profit in the long-run. When a monopoly produces output at the level that maximizes profit, it aims to benefit in the short-run. Therefore, when the firm increases production and sells more output, it seeks at building initial revenue and holds it constant.

References

Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western Cengage Learning.

Meacher, W. A. (2009). Economics: A contemporary introduction. Mason, OH: South-Western Cengage Learning.

 
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