4.
3 THE NATURE OF MARKETS-
MONOPOLY AND PERFECT
COMPETITION
a. PERFECT COMPETITION
A market structure where many buyers and sellers trade a homogenous product with no
individual having significant market power to influence the price, prices are determined by
the forces of demand and supply so all firms are price takers.
CHARACTERISTICS OF PERFECT COMPETITION
There are many sellers [1]so none can control the market price or supply on their own.[1]
There are no barriers to entry & exit from the industry: [1]firms can start-up or leave the
industry with relative ease which increases the level of competition[1]
The products offered are homogenous/identical:[1] this means firms are unable to build brand
loyalty as perfect substitutes exist & any price changes will result in losing customers[1]
Individual firms are price takers [1] meaning they must accept the market price determined by
overall supply and demand, they cannot influence prices through their own production levels.[1]
All buyers and sellers have perfect information about prices, product quality, and market
conditions, [1]leading to informed decisions when buying.[1]
ADVANTAGES OF PERFECT COMPETITION
Consumer Choice [1]: as there are many sellers who provides consumers with a wide variety of
goods This competition can lead to better quality products and services as firms strive to attract
customers.
Lower Prices [1] :The presence of competition generally leads to lower prices for consumers, as
firms compete to attract buyers and cannot charge more than the market price.
Better quality products : [1] as firms strive to innovate & continuously seek to improve quality of
their goods/services in order to become recognised in a crowded market [1]
DISADVANTAGES OF PERFECT COMPETITION
Low Profit Margins [1]: as Firms generally operate with very thin profit margins since prices are
driven down to the level of average costs, this can be unsustainable for businesses in the long
run if costs rise.
Limited Innovation [1] The need to keep prices low can sometimes limit the funds available for
innovation and research, especially for smaller firms that may not have enough resources. [1]
Wasteful competition:[1] in order to keep up with other firms,
producers will duplicate items [1]
b. MONOPOLY
A market structure where one supplier dominates the market, selling one product with no close
substitute and is the price maker as has significant market power.
CHARACTERISTICS OF MONOPOLY
There is only one seller or producer in the market [1] which controls the entire supply of a
product. [1]
Product offered has no close substitutes [1] making it unique in nature. [1]
The monopolist is the price maker [1] has control over the price of the product. that is they set their
own price as they have the market power to do so, rather than having to base their price on the equilibrium price
determined by the forces of demand and supply.
There are barriers to entry like high startup costs, patents, licenses, control of raw materials
[1]which prevent other firms from entering the market. [1]
The monopolist has market power [1] which allows them to influence market prices, supply, and
overall market conditions. [1]
Use price discrimination [1]i.e monopolists may charge different prices to different customers
based on their willingness to pay, thereby maximizing revenue. [1]
ADVANTAGES OF MONOPOLY
Enjoy from economies of Scale: [1] this can lead to lower costs per unit and potentially lower
prices for consumers. [1]
Have greater financial resources to invest in research and development [1] which can lead to
innovation and advancements in products and services. [1]
Stable Prices: [1] as they can control fluctuations in supply and demand [1]
Reduce wasteful competition [1]
DISADVANTAGES OF MONOPOLY
Higher Prices for consumers [1] since the firm can set prices above the competitive market level
due to lack of competition. [1]
Reduced Consumer Choice [1]as there is only one provider of the product. [1]
Lower quality products: [1] as there is little or no competition,
monopolies have no incentive to raise quality, as consumers will have
to buy from them anyway. [1]
Price Discrimination charging different prices to different consumers based on their willingness
to pay, which can lead to unfair practices.