Economics is divided into two main branches. Those are microeconomics and macroeconomics. Microeconomics deals with the behavior of individual economic units, which are consumers, workers, investors, owners of land, business firm and so on. Why and how those units make economic decisions means microeconomics. For an example, microeconomics explains how consumers make purchasing decisions and how their choices are affected by changing the prices and incomes.
2.0 Introduction of Question 1
Monopoly is a situation that just has only one seller in the market of the product or service. Because of lack of competitors, a monopolizing company can set the price for his own advantage and the buyers should accept it but the price must change follow by the monopoly theorem to prevent new participant to be his competitors in the market.
2.1 Monopoly
A monopoly is a market that has only one seller but many buyers. According to www.investopedia.com, the definition of monopoly is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. According to useconomy.about.com, definition of monopoly is when a business, usually a large corporation, is the only provider of a good or services. Monopolies are usually bad for an economy because they limit on free trade and allow the market itself to set prices. Therefore the antimonopoly regulation had existed to protect free markets from being dominated by a single entity. As a sole producer of a product, a monopolist is in a unique position. If the monopolist decides to raise the price of the product, it need not worry about competitors who, by charging lower prices, would capture a larger share of the market at the monopolist’s expense. The monopolist is the market and completely controls the amount of output offered for sale.
A monopolizing company is a price maker and lack of competitors in the market so the demand is price inelastic.
Although monopolizing company can change the price as his advantage but it should be follow the monopoly theorem by setting output where MR = MC
This will be at output Qm and Price Pm.
If the market was competitive the price would be lower and output higher.
The demand curve for a monopoly firm is downward slopping。 I had shown that the average revenue or price for every unit of output sold. Figure at above was show the demand curve and MR curve for a monopoly firm. MR is additional in total revenue from selling one more unit. Total revenue is the prices multiply with quantities. Follow the figure above the demand curve as well as MR curve slope downwards. But the MR curve lies below the average revenue or demand curve. Monopolist sets a price for a product; it will consider the elasticity of demand for his product. The monopolist will fix a higher price if demand is inelastic and lower price if the demand is elastic.
2.1.1 Characteristic of Monopoly
Other corporation should be high barriers to entry. That’s means other firms cannot enter the market easily and provide the good. A monopoly is a single seller of a good so that the substitutes are not readily available. Other than that, monopoly often created due to legal barriers. Licensing restrictions is one of the legal barriers which often limit who is allowed to provide a product or service in a specific geographic area. Natural monopoly is one firm can provide the good most efficiently. As an example, Microsoft is a monopoly power instead of Linux. Although Linux is an alternative operating system for personal computers but it does not make sense for most consumers. Customers are adhering to a common standard and Microsoft is providing the common standard for personal computer operating system so Microsoft has consider as a monopoly power. Another example for natural monopoly is distribution of electrical power to a local community which is Tenaga Naional Berhad (TNB). TNB is the largest electricity utility in Malaysia with almost RM73 billion in assets. It would increase overall costs to make an exact copy of power lines within a community. Therefore, for a natural monopoly, with government policy will not encourage more entrants. Other than natural monopoly, there have a market structure call pure monopoly. The monopoly manufacture can be an individual, a group of partners or it might be a joint venture and it is being the only one to supply the goods or services and those goods and services cannot get substitutes easily. The firm to manufacture goods or services can be known as industry too if it is a pure monopoly but not necessarily true. It can be a monopolistic competition when few manufacture who produce close substitutes and holding a substantial market share. Monopolistic competition is an imperfect form of extreme market. That is no way for new organizations with free entry to monopoly market arrangement because it is prohibited. There are few barriers to restrict the entry of other sellers which are government license or franchise, resource ownership, patents and copyrights, high start-up cost and decreasing average total cost. Monopolizing company has an ability to control the price make himself more profitable and the consumer has to accept it. Therefore, the monopolizing company is a price maker and not a price taker. As a monopolizing company it can sell its products and services in a maximum profit because of lack of competitor in the market. Although it can change the price for its advantages but monopolizing company have to regulate the set of products and services within the monopoly theorem to prevent the new entry of competitors. Monopolizing company can carry on price discrimination. It means that he can sell his products or services in different prices for different buyers.
2.2 Conclusion of Question 1
Monopoly is a situation when the products or services have only one single supplier in the market. Although monopolizing company can set his product or service to maximum profit but it should depends on the monopoly theorem. There have many characteristics for as a monopolizing company such as he is the single seller, he can constricting the entry of new seller, full control over price, carry out price discrimination and so on.
3.0 Introduction of Question 2
Perfect Competition is there are too many buyers and sellers, they can’t influence the market or price and the price are depends on the supply and demand. Monopolistic competition is there are many competitors too but the product or service they produce will be slightly different so they can make their own decision for the price. Oligopoly is there are a few of firm make up the market. Although there are just a few of firms make up the market but there has a possibility to the small firm to enter the market. They are interdependence among the competitors so when decreasing the price, he must take the possibility that others will reduce the prices into the account.
3.1 Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly
I use a local farmer to be an example for perfect competition. The numbers of competitors are many. For the stationary store (monopolistic competition), number of competitors are many but fewer than in pure competition. For Steel industry (oligopoly), there is little number of competitors. For monopoly such as public utility, there is none of competitors. For perfect competition, ease of entry into industry is relative easy and fairly easy for monopolistic competition. For oligopoly, it is difficult to entry into industry and for monopoly; the ease of entry into industry is regulated by government. The similarity of goods or services offered by competing firms is identical for perfect competition, similar for monopolistic competition, can be similar or different for oligopoly and no directly competing goods or services for monopoly. There is none of the level of control over price by individual firms for perfect competition. For monopolistic competition, there are some level of control over price by individual firms same as oligopoly but for monopoly, the level of control the price over by individual firms is considerable.
3.2 Conclusion of Question 2
Perfect competition is there have many sellers and buyers in the market but none of them can influence the market and the prices. Monopolistic competition is many competitors in the market but the product of them are slightly different. Oligopoly is there have a few of firm make up the market and they are interdependence. Monopoly is there only has one seller or supplier for the product.
4.0 Conclusion and Recommendation
Monopoly is the condition when there have only one seller in the market to produce the product or service. There are many characteristics of monopoly which are single seller, restricted entry of others new participants, full control over the price and price discrimination. A perfect competition means sellers and buyers cannot influence or control the price and cannot affect the market although it has large number of buyers and sellers in the market. Monopoly is a situation that just only one seller for the products or services so monopolizing company can fully controls the market and the price. Oligopoly is a condition that they have few firms in the market to produce the product or service but there is the only one to control the market. Monopolistic competition is there are many competitors in the market but every product from different sellers is slightly different
