Market represents all the areas in which buyers and sellers are in contact with each other for the purchase and sale of the commodity.
Perfect competition is an assumption made by economist which seldom exists in the real world. It is a market situation in which there is a perfect competition between buyers and sellers. No individual buyer or seller is able to influence the existing price of the commodity in the market under perfect competition .The seller accepts the price determined by the forces of demand and supply. It is therefore, said that a seller under perfect competition is a price taker.
The demand curve under perfect competition is a horizontal straight line parallel to the OX axis. This is because all the units of the commodity are sold at the same price under the perfect competition
Features of perfect competition
The important features of perfect competition are the following
A large number of buyers and sellers
Homogeneous products: – The products brought for sale in the market must be identical in all respects –in size, shape colour, quality, packing etc
Mobility of goods and factors of production: – There must be perfect mobility for goods and factors of production in the market.
Perfect knowledge about market conditions:-Each buyer and seller under perfect competition must have complete knowledge regarding the present and future prices of commodities and their costs.
Monopoly implies the absence of all competitions. It is the very opposite of perfect competition. Monopoly is said is said to exist when one firm is the sole producer or seller of a product which has no close substitutes.LEC is the example of monopoly market in Lesotho
The monopolist is the only one seller of the commodity in the market. The monopolist is, thus, a price maker and not a price taker. The demand curve facing a monopolist is a downward sloping curve. This implies that more units of a commodity can be sold only at a lower price.
In a pure monopoly the single firm controls the total supply of whole industry and is able to control over the price. In this way, a monopoly is a price maker. This helps a monopoly to maximize its profits. These are often called excess profit or abnormal profits. The monopolist must prevent new firms come in to the market. Any increase in supply from new firms will force price and profit down
Price discrimination: – The monopolist may charge different prices for the same commodity to different customers. This practice of a monopolist charging different prices for the same commodity to different customers is called price discrimination. A doctor charging a higher fee to a rich person and a lower fee to a poor person for the same service can be considered an example of price discrimination.
Monopolistic competition is a concept introduced by prof. Chamberlin.It is a market situation that exists in the real world. It is a part of monopoly and part of competition. The important distinguishing characteristics of monopolistic competition are:
- There are very large number of buyers and sellers in the market
- The products are differentiated
- There is a complete freedom for firms to enter in or get out of the industry
How monopolies can restrict competition?
A monopolist try to prevent new firms come to the market by creating barriers to entry. Some important barriers to entry are the following
Economies of scale: – By increasing in size of the firm may be able to reduce the average cost than the small firm.
Capital size: The big firm only provide some service such as gas, electricity, water supply etc. For provide these services only by huge firm.
Historical base:- A business may have a monopoly because it was first to enter the market for a product and has built up an established customer base.
Legal consideration: patent right may help the monopolist to prevent new firms come to the market.
Advantages of monopoly:-A monopolist may have a chance to earn high profit. This may led to invest money for innovation and more efficient production process. This cost saving may be passed on to consumers as lower prices.
Some monopolies are government owned in many countries like gas, water and electricity supply. In this way a monopoly can be run in the public interest rather than making a profit for its owners.
Disadvantages of monopoly
The following are the main disadvantages of a monopoly or group of firms acting together like a monopoly.
- Less consumer choice
- Higher prices
- Lower product quality
- X inefficiency: – because a monopoly has no competition and earns high profit it may make less effort than a competitive firms to ensure its recourses are used most efficiently. This means a monopoly may be inefficiently run and production costs may be higher than they would otherwise be in a competitive firm. This is called X inefficiency
Today, most markets can be described as oligopolistic. An oligopoly exists if a small number of firms dominate the supply of particular goods or services to a market. The oil extraction and petroleum market, commercial banking, airline, manufactures of car etc
Sometimes firms in an oligopoly will collude to influence the market price by restricting supply and new competition, in effect form a monopoly. So many countries control oligopolies by law to avoid abuse their dominant market.
A cartel is a formal agreement between firms to regulate market supply and price .The best –known cartel is OPEC that attempts to manage the world supply of crude oil in order to determine its market price