Harrod (1934) stated that the volume of output (figure 2) is determined by the intersection between the marginal revenue curve, derived from the demand curve, and the marginal cost, but the price m p is defined by the demand curve. According to robinson (1933 the demand curve imposes upon the seller a price problem for his product comparatively to the horizontal one from the perfect competition. However, the monopolist decision about the price and the output depends upon the elasticity of the curve and upon its position relative to the cost curve for his product. In that circumstance, profits may be bigger, perhaps by increasing the price and selling less, perhaps by reducing it and selling more. The position and elasticity of the demand curve for the product of any one seller depend in large part upon the availability of competing products and prices that are asked for them. Since there are barriers to the entry of new firms, the supernormal profits derived from the monopoly will not be competed away in the long run. The only difference, therefore, between short-run and long-run equilibrium is that in the long run the firm will produce where mr long-run.
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For example, in saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on viagra. Firms with a monopoly position is a price maker because a single firm controls the total supply in a pure monopoly, it is able to exert a significant degree of control over the price by changing the quantity supplied. The adventure conventional concept times of monopoly was the main part of the field of production outside that of perfect competition, so it was recognized that the monopolist's position was never absolute and the elasticity of the demand for his product was always greater than zero. Harrod (1934) reveals that if products are absolutely homogeneous and marketed by organized exchange is likely to perfect competition to reign. If differences of design and detail are possible, each producer may be defined as a monopolist of his own goods, but subject to the reaction of his rivals. The degree of monopoly may be measured by the similarities of commodities. Figure: The traditional analysis of monopoly. Source: Adapted from Harrod (1934 the notation in the figure 2 is given as such: mc is the marginal cost, d is the demand, mr is the marginal revenue, q is quantity, and p is the price.
They will compete with the first firm, driving the market price down until all firms are earning normal profit, it could be said that supernormal profit is guaranteed 'competed away'. On the other hand, if firms are making a loss, then some firms will leave the industry, reduce the supply and increase the price. Therefore, all firms can only make normal profit in the long run. Monopoly, a monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource.
However, this supernormal fuller profit that some firms made will not last as it will attract new firms into the biography industry (Sloman 2005). The arrival of new firms shifts the supply curve to the right, as shown in the diagram below, and pushes the price down. The lower price shifts the average revenue curve downwards until all the supernormal profit has been competed away and the firms are making just normal profits. This long-run equilibrium is shown in the diagram below. Another force that shifts the supply curve happens when discontinuous changes in the number of fresh entrepreneurs (each in front of imperfect knowledge of the others' action) come into the trade. Through this new competition, actual profits are heavily reduced to a level below the one that attracts new comers, but they are not sufficiently low to run out any existing firms. The industry will continue at this inflated size, and it will be in equilibrium in the sense that no new enterprise tends to enter or old enterprise to leave (Robinson 1934). In a word, in contrast to a monopoly or oligopoly, it is impossible for a firm in perfect competition to earn supernormal profit in the long run, which is to say that a firm cannot make any more money than is necessary to cover its. If a firm is earning supernormal profit in the short term, this will act as a trigger for other firms to enter the market.
Not all firms make supernormal profits in the short run. Their profits depend on the position of their short run cost curves. Some firms may be experiencing sub-normal profits because their average total costs exceed the current market price. Other firms may be making normal profits where total revenue equals total cost (i.e. They are at the break-even output). In the diagram below, the firm shown has high short run costs such that the ruling market price is below the average total cost curve. At the profit maximizing level of output, the firm is making an economic loss (or sub-normal profits).
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Larger firms will require making a larger total profit to persuade them to stay in an industry. Total normal profit is thus larger for them than your for a small firm. The rate of normal profit will probably be similar. Supernormal profit is any profit above normal profit. If supernormal profits are made, new firms will be attracted into the industry in the long run.
Thus whether the industry expands or contracts in the long run will depend on the rate of profit. Naturally, since the time a firm takes to set up in business varies from industry to industry, the length of time before the long run is reached also varies from industry to industry. Thereby, in the short-run, it may be possible for an individual firm to make supernormal profit. This situation is shown in the diagram below, as the price (average revenue) is above the average cost (AC). As fewer firms had happened to enter in the period of high profits, the actual price of a given output would be higher.
Competition might not actually direct to a peaceful state because market forces distinguish profit and utility maximizing behavior with an equilibrium situation that can be, from a social viewpoint, sub-optimal (Steven and heijdra 2004). 2.1 The short run and the long run. In the short run, the number of firms is fixed. Depending on its costs and revenue, a firm might be making large profits, small profits, no profits or a loss; and in the short run, it may continue to. In the long run, however, the level of profits affects entry and exit form the industry.
If profits are high, new firms will be attracted into the industry, whereas if losses are being made, firms will leave. 2.2 Normal and supernormal profits in a context of perfect competition. Normal profit is the level of profit that is just enough to persuade firms to stay in the industry in the long run, but not high enough to attract new firms. If less than normal profits are made, firms will leave the industry in the long run. Although the talking is about the level of normal profit, in practice it is usually the rate of profit that determines whether a firm stays in the industry or leaves. The rate of profit (r) is the level of profit (TÐ¿) as a proportion of the level of capital (K) employed (Sloman 2005).
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There are four conditions that have to be fulfilled for perfect competition to exist in an industry:. There must be many buyers and sellers and none of them can be large enough to have any influence over the market price. There must be perfect knowledge of the market (this means no advertising is necessary). There must be no barriers to entry - firms must have complete freedom of entry and exit. The goods being sold must be homogenous in nature. If these conditions are met, then the industry is in perfect competition (Sloman 2005). Perfect competition was well developed listing to illustrate that in some sense it is optimal and in fact represents the end-state. Consequently, it meant that competition between buyers and sellers was completed, and neither party can increase utility or profits (Steven and heijdra 2004). Transformation occurs only if independent variables change, but the situation becomes how fast and under what circumstances the new equilibrium will be accomplished.
a perfect competition situation towards a price maker monopoly situation as part of their corporate strategy." The scope of this paper focuses on the two extremes-perfect competition and monopoly. The writer's insufficient experience in the microeconomic area appears to be main limitation of this report. Perfect competition, industries are traditionally divided into four categories according to the degree of competition that exists between the firms within the industry (Sloman 2005 At one extreme is perfect competition where there are very many firms competing. Each firm is so small relative to the whole industry that is has no power to influence price. It is a price taker. At the other extreme is monopoly, where there is just one firm in the industry, and hence no competition from within the industry. In the middle come monopolistic competition, which involves quite a lot of firms competing and where there is freedom for new firms to enter the industry, and oligopoly, which involves only a few firms and where entry of new firms is restricted. Perfect competition is a theoretical market structure that will give the optimum allocation of resources (Sloman 2005).
This is followed by an analysis of monopoly. Specific information is given out here. And then Strategies for maintaining monopoly position is given for references but they may not always helpful. Finally, it reaches the overall conclusion of this paper. Table of Contents. Perfect competition.1 essay The short run and the long run.2 Normal and supernormal profits in a context of perfect competition. Strategies for maintaining monopoly position. Conclusions, list of References.
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