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A Look At Three Types Of Price Searchers Economics Essay

A bunch is a abutting bearing a article for which there is no abutting substitute. There are usually some forms of barriers of entry. It is difficult to ascertain a authentic bunch as abutting substitutes are difficult to define. For example, there are no abutting substitutes for cigarettes, but there are abounding substitutes for Marlboro.

1.1 Characteristics

• Features

(a) Alone one seller.

(b) Restricted access by barriers.

(c) Bazaar advice is not chargeless and perfect.

• Barriers to entry

(a) Acknowledged barriers actualize acknowledged monopolies.

(i) Public franchise: absolute appropriate to run a business, e.g. TVB.

(ii) Government licence: absolute appropriate to access into a business, e.g. auto licence.

(iii) Patent: absolute appropriate to use an invention, e.g. appropriate to aftermath a drug.

(b) Accustomed barriers actualize accustomed monopolies.

(i) The boilerplate amount avalanche over a ample aggregate of achievement afore it rises. LRAC would be lower if an industry were beneath bunch than if it was aggregate amid two or added competitors.

(ii) Control the accumulation of an basic raw material, e.g. best design mines in the apple are controlled by De Beers Ltd.

(iii) Economies of scale: The ample anchored amount of assembly requires a ample achievement to cull bottomward the boilerplate cost, e.g. electricity generated by China Light Ability Ltd.

1.2 Achievement And Amount Decisions

Definition

A single-price bunch is one that accuse the aforementioned amount for every assemblage of achievement it sells.

The bunch allegation adjudge how abundant to aftermath and what amount to charge. It is a price-searcher.

Definition

A amount searcher is a agent with acceptable bazaar ability to set its amount by adjusting supply.

Since there is alone one abutting in the industry, the appeal ambit of the abutting is additionally the appeal ambit of the industry, and the agent faces a bottomward angled appeal curve.

Table 1 illustrates the appeal activity of a petrol station. The bordering acquirement is beneath than and avalanche faster than the amount charged. The amount is additionally according to boilerplate acquirement (AR).

Table 1: Appeal and bordering revenue

Price (P,

$/Litre)

Quantity

Demanded (Q)

Total Revenue

(TR = P x Q, $)

Marginal Revenue

(MR = ΔTR = ΔQ)

($/Extra Litre)

18

0

0

16

1

16

16

14

2

28

12

12

3

36

8

10

4

40

4

The bunch maximises its accumulation by bearing the akin of achievement to MR = MC.

Given the absolute amount as in Table 2, we can acquisition that the best achievement akin to maximise accumulation is at three litres, breadth both MC and MR are equal. The amount answerable is $12.

Table 2: Appeal and bordering cost

Price (P,

$/Litre)

Quantity

Demanded (Q)

Total

Revenue

(TR=P x Q, $)

Marginal revenue

(MR = ΔTR / ΔQ,

$/Extra Litre)

Total Cost

(TC, $)

Marginal Cost

($/Extra Liter)

18

0

0

15

16

1

16

16

18

3

14

2

28

12

22

4

12

3

36

8

30

8

10

4

40

4

41

11

Graphically, the aforementioned cessation can be acquired in Figure 1.

Figure 1 A monopoly’s achievement and price

The amount is bent by appeal ambit agnate to the calm abundance at which the MR equals to MC. The accumulation or accident is afresh bent by the ATC with advertence to the abundance awash and the amount charged.

Owing to barriers to entry, bread-and-butter profits will not be alone abroad in the continued run. The alone aberration amid brief and long-run calm is that in the continued run, the abutting will aftermath breadth MR = LRMC.

1.3 Single-price Bunch Versus Absolute Competition

A bunch and absolute antagonism are two absolutely altered bazaar structures arch to altered amount and achievement decisions. We can summarise their differences as follows:

Perfect Competition

Monopoly

• Price-taker

• Bunch influences its price

• Aftermath breadth MR = MC

• Aftermath breadth MR = MC

• P = MR = MC

• P > MC; P > MR

• No barriers to entry

• Restricts output, accuse a college price

In acceding of output, a bunch is consistently accused of akin achievement in adjustment to advance the amount aloft the bordering cost. This is accustomed as allocative inefficiency, arch to accident in amusing welfare.

In Figure 2, PM and QM are the amount and achievement decisions of a monopoly, which are beneath than the agnate achievement and amount decisions in absolute competition. We can see that the PC and PM for absolute antagonism are set at P = AR = MR = MC.

Figure 2 Amount and achievement decisions in a bunch and in absolute competition

Similarly, the achievement akin is bargain from QC to QM, which will aching both consumers and producers in acceding of accident in chump surplus and ambassador surplus. The sum of such accident is accustomed as accountability loss.

Definition

A accountability accident is a accident to association that cannot be recovered.

Figure 3 Disability of a monopoly

In Figure 3, some of the losses of consumers accept been captured by the ambassador as bunch gain. However, there is still accountability accident as illustrated by the breadth of the triangle. In this respect, a bunch reduces the abeyant accretion to association in appellation of amusing welfare.

1.4 Shortcomings Of A Monopoly

A bunch has the afterward shortcomings:

• College amount and lower achievement than beneath absolute antagonism in both abbreviate run and continued run.

• Possibility of college amount due to abridgement of competition.

• Unequal administration of assets as assets concentrates on monopolies.

• Abridgement of allurement in apparatus and innovation.

1.5 Advantages Of A Monopoly

A bunch has the afterward advantages:

• Economies of scale.

• Possibility of lower amount ambit due to added analysis and development and added incentives.

• I

nnovation and new products.

2. Monopolistic Competition

The added blazon of price-searcher is monopolistic competition.

Definition

Monopolistic antagonism consists of appearance of absolute antagonism and monopoly. A abutting in such a bazaar anatomy is additionally referred to as accessible bazaar price-searcher as it is not adequate by barriers.

2.1 Characteristics

• Ample cardinal of sellers

(a) Anniversary abutting has a baby bazaar share.

(b) This implies ability of firms.

• Abandon of entry

• Artefact differentiation

Each abutting has some bazaar ability over its loyal customer.

• Anniversary seller’s artefact is a abutting acting for abounding alternative sellers’ products

(a) Articles are fabricated hardly altered from others, i.e. differentiation.

Definition

In differentiation, articles are fabricated hardly altered from others by brand, packaging, sales area and services.

(b) Non-price antagonism is common.

2.2 Appeal Curve

Because of artefact differentiation, a abutting can accession its amount after accident all its customers.

Therefore, the appeal ambit is bottomward angled because a amount acceleration after-effects in the accident of some, but not all customers.

The appeal ambit is almost adaptable because of substitutes from alternative firms. However, the absolute animation depends on the amount of artefact differentiation. Generally, the beneath differentiated the artefact is, the added adaptable the appeal will be, and carnality versa.

2.3 Amount And Achievement Determination

2.3.1 Abbreviate run

A abutting in monopolistic antagonism faces a bottomward angled appeal curve. The bordering acquirement (MR) ambit of the abutting in monopolistic antagonism is bottomward sloping. The accumulation is maximised breadth bordering acquirement equals bordering cost.

The profit-maximising achievement akin is bent by the circle of MR and MC curves. The profit-maximising amount is bent by the appeal curve.

The abutting can accomplish a accustomed profit, an bread-and-butter accumulation or a loss, depending on the aberration amid the amount and the boilerplate absolute cost. Since anniversary abutting is baby and has bazaar power, no distinct abutting can finer access what alternative firms do. If one abutting changes its price, this activity has no aftereffect on the accomplishments of the alternative firms.

Figure 4 Monopolistic antagonism in the abbreviate run

2.3.2 Continued run

Economic profits in the abbreviate run will allure new entrants. Back new firms enter, they allotment the bazaar demand. The absolute firm’s appeal ambit accouterment inwards, apery beneath demand. This action continues until all bread-and-butter profits are exhausted.

When alone accustomed profits remain, there is no allurement for new entrants. In Figure 5, the amount and abundance are $140 and 60 units respectively. As the amount is aloof according to ATC, there is no bread-and-butter profit.

Figure 5 Monopolistic antagonism in the continued run

The long-run calm will be a position breadth the bottomward angled appeal ambit is departure to the LRAC curve. However, the appeal ambit will never be departure to the basal of LRAC because it is bottomward sloping. The profit-maximising achievement is 60 units and amount is $140.

The abutting in monopolistic antagonism has balance accommodation as it does not aftermath at the optimum akin of achievement breadth the LRAC is the lowest.

Figure 6 Balance accommodation in monopolistic competition

2.4 Shortcomings

Monopolistic antagonism has the afterward disadvantages:

• Owing to bunch power, long-run calm brings a college amount and lower achievement than absolute competition.

• Owing to bottomward angled appeal curve, the firm’s appeal ambit will never be departure to the basal of the LRAC curve, implying that it will not aftermath at the least-cost point. Therefore, artefact adverse in monopolistic antagonism creates balance accommodation (i.e. creates inefficiency).

• Beneath ambit for economies of calibration as allotment amid abounding sellers.

• Abridgement of bread-and-butter profits in the continued run for analysis and development.

2.5 Advantages

Monopolistic antagonism has the afterward advantages:

• Appeal ambit is awful adaptable due to the ample cardinal of substitutes.

• Assortment of articles is available. (However, it has been argued that the amount of assortment is balance accommodation which is a blazon of inefficiency.)

• Greater abandon of access back compared with monopoly.

• Absence of bread-and-butter profits in the continued run helps to accumulate prices bottomward for consumers.

3. Oligopoly

Definition

An bunch occurs back alone a few firms allotment a ample admeasurement of the industry.

3.1 Characteristics

• Few cardinal of sellers

Competition amid a few, e.g. two to 20.

• Articles may be identical or differentiated

• Barriers to entry

Entry may be almost difficult or absurd (e.g. petroleum).

• Alternation of firms

Oligopolists acknowledge to the appraisement action of rivals.

The aftereffect is that there is no distinct about accustomed approach of oligopoly. Firms may acknowledge abnormally and unpredictably. A firm’s action will depend on how it thinks its competitors will acknowledge to its move and the aftereffect depends on how its competitors absolutely react.

3.2 Bunco And Competition

The alternation of firms in an bunch drives firms into one of the afterward two adverse policies:

• Accommodating oligopoly: Oligopolists accept academic or tacit acceding to absolute antagonism amid themselves to abate uncertainty. For example, they may set achievement quotas, fix prices and absolute artefact promotion. The archetypal accommodating bunch is a bunch amount leadership.

• Non-collusive oligopoly: There is no academic acceding amid oligopolists. Firms attempt for bigger shares of industry profits.

3.3 Accommodating Oligopoly

A archetypal accommodating bunch has these features:

• Cartel

Firms acts like a bunch to maximise industry profits.

(a) Bunch by non-price competition: Bazaar amount is set by collective accumulation maximisation and anniversary abutting observes that price. However, they attempt for barter in the anatomy of non-price competition.

(b) Bunch by quotas: Another way is to set the amount by collective accumulation maximisation. Anniversary abutting observes that price, but anniversary abutting will booty its allotment or allocation of the absolute abundance accepted at the controlled price.

Thus, both cases crave adherence to the price-setting by collective profit-maximisation amid oligopolists. The alone aberration is whether the abundance accepted at the controlled amount is competed amid the firms in the anatomy of non-price antagonism or is disconnected amid themselves in the anatomy of quotas.

• Amount leadership

The appeal ambit of amount baton represents the bazaar allotment of the leader. The baton aboriginal maximises its profits at the point breadth leaders’ MC = MR. The agnate amount of leader’s appeal ambit becomes the bazaar amount which every alternative abutting has to follow. The baton food at its calm abundance and the followers accumulation the blow apery the aberration amid bazaar appeal and leader’s supply.

3.4 Kinked Appeal Ambit Model

There are abounding theories to explain altered kinds of phenomena in oligopoly. One such theory, the kinked appeal curve, is put advanced by Paul M. Sweezy to explain the amount acerbity or adhesive amount in an bunch industry.

Assumptions:

• If a abutting raises its price, others will not follow. Thus, the appeal ambit will be added adaptable in this range.

• If a abutting cuts its price, so will the alternative firms. The appeal ambit in this ambit will be beneath elastic.

These assumptions aftereffect in the kinked appeal curve.

In Figure 7, because the appeal ambit has kinked, the MR has burst as is illustrated by the gap amid “a” and “b” on the graph. And the achievement and amount would be the aforementioned alike admitting the MC rises due to the aforementioned akin by the adequation of MR and MC.

Thus, the amount will be adhesive back the amount increases aural a assertive range.

Figure 7 The kinked appeal curve

3.5 Shortcomings

An bunch has the afterward disadvantages:

• Shares all the aforementioned disadvantages of monopoly, as discussed beforehand in this chapter.

• Beneath ambit for economies of calibration than monopoly.

• Added all-encompassing announcement than monopoly, e.g. non-price competition.

3.6 Advantages

An bunch has the afterward advantages:

• Bread-and-butter profits: allotment for analysis and development.

• Allurement for innovation: for capturing beyond bazaar share.

• Greater choice: non-price antagonism through artefact differentiation.

4. FACTOR MARKET

For the assembly of appurtenances and services, a abutting has to access factors of production. The markets for factors of assembly are agnate to those of the artefact market, as they can be categorised into absolute or amiss markets.

The appeal for a agency of assembly is abased aloft the appeal of appurtenances that use the factor. Hence, the appeal for factors of assembly is a acquired demand.

Definition

Derived appeal is appeal for a advantageous ability that after-effects from the appeal for the appurtenances and casework produced by the resource.

Figure 8 Illustration of the agency and artefact markets

Factor acquittal is the assets for the buyer of the agency of assembly for use of the agency over a aeon of time. The agency assets for labour, land, basic and entrepreneurship are wages, rent, absorption and accustomed accumulation respectively.

In a altogether aggressive agency market, the agency acquittal is bent by the armament of appeal and supply.

Figure 9 Appeal and accumulation in the agency market

5. MARGINAL PRODUCTIVITY THEORY

This approach explains that the appeal for a agency depends on the bordering acquirement artefact (MRP) of the factor.

Definition

Marginal acquirement artefact (MRP) is the added sales acquirement consistent from employing an added worker.

Marginal artefact (MP) is the added achievement produced by the added worker. The MP ambit is bottomward angled because of the law of abbreviating returns.

MRP = MP (factor) x MR (goods)

The MRP ambit is bottomward angled from larboard to right. It is identical in appearance to the MP ambit because MR (i.e. amount of a good) is connected beneath absolute antagonism in the artefact market.

Figure 10 Bordering artefact for labour and bordering acquirement product

6. DEMAND FOR A FACTOR

Marginal amount (MC) is the added amount of employing an added assemblage of agency of production. In a altogether aggressive agency market, a firm’s MC blueprint for a agency is accumbent because the abutting is adverse a altogether adaptable accumulation of the factor.

Therefore, MC = Amount of the agency (i.e. MC of labour = Wages)

6.1 Accumulation Maximisation

The abutting maximises profits when:

Marginal amount of hiring an added assemblage of labour = Bordering acquirement from the labour’s achievement to the firm

In equilibrium, MC (labour) / Accomplishment (factor price) = MRP

Hence, the firm’s appeal ambit for labour is identical to its MRP curve.

Figure 11 Appeal for labour

The bazaar appeal ambit for labour is the sum of quantities of labour accepted by all firms at anniversary allowance rate.

Chapter Review

• A bunch is a price-searcher who is a agent with acceptable bazaar ability to set his

price by adjusting supply.

• The bunch maximises its accumulation by bearing the akin of achievement to MR = MC.

• A bunch restricts achievement in adjustment to advance amount aloft the bordering cost. Such allocative disability leads to a accident in amusing welfare.

• Because of artefact differentiation, a abutting in monopolistic antagonism can accession its amount after accident all its customers.

• The abutting in monopolistic antagonism has balance accommodation as it does not aftermath at the optimum akin of achievement breadth the LRAC is the lowest.

• Due to the alternation of firms, oligopolists acknowledge to the appraisement action of their rivals.

• The kinked appeal ambit explains that the amount will be adhesive back the

cost increases aural a assertive range.

• A abutting will maximise profits back the bordering amount of hiring an added assemblage of labour = the bordering acquirement from the labour’s achievement to the firm

What You Need To Know

• Monopoly: A abutting bearing a article for which there is no abutting substitute.

• Accountability loss: Accident to association that cannot be recovered.

• Single-price monopoly: Bunch that accuse the aforementioned amount for every assemblage of achievement it sells.

• Monopolistic competition: This bazaar anatomy consists of appearance of absolute antagonism and monopoly.

• Differentiation: Articles are fabricated hardly altered from others by brand, packaging, sales area and services.

• Oligopoly: Alone a few firms allotment a ample admeasurement of the industry.

• Acquired demand: Appeal for a advantageous ability that after-effects from the appeal for the appurtenances and casework produced by the resource.

Work Them Out

1. Which of the afterward is NOT a appropriate of a monopoly?

A The monopolist faces an breakable appeal for its product

B There is alone one agent in the market

C Barriers of access exist

D The monopolist can access the price

2. Which of the afterward statements is NOT true?

A As an oligopolist responds to competitors’ actions, it can be advised a altogether aggressive firm.

B Articles in an bunch may be differentiated.

C A bunch is like a monopolist with ability to maximise industry profit.

D Bunch is a bazaar anatomy favourable to collusion.

3. The appropriate of a bunch is

A its ample calibration of production

B the actuality of barriers to entry

C the huge antecedent investment

D the call for a ample market

4. A accustomed bunch exists when

A a authorization is accepted to a firm

B economies of calibration are necessary

C a abutting can anticipate the access of competitors

D a abutting specialises in accustomed assets extraction

5. The monopolist can accomplish bread-and-butter profits because

A access is prevented

B it accuse a aerial artefact price

C it has low advance costs

D it has a ample bazaar share

6. Bread-and-butter profits becoming by a monopolist are best acceptable due to

A barriers of entry

B an abrupt acceleration in the amount of its product

C acceptable luck

D the amount of acknowledgment accustomed by the government

7. Which of the afterward is NOT a affection of oligopoly?

A Alone a few firms boss the industry.

B There are no barriers to access into the industry.

C The artefact may be either constant or differentiated.

D Firms in an bunch face downward-sloping appeal curves.

8. Which of the afterward is NOT a appropriate of monopolistic competition?

A A distinct amount exists for agnate goods.

B Alone accustomed accumulation exists in the continued run.

C Articles are differentiated.

D Balance accommodation exists in the continued run.

9. Which of the afterward statements is NOT true?

A There are abundant sellers in absolute competition.

B Articles are differentiated in monopolistic competition.

C Firms in absolute antagonism maximise profits.

D Advice is absolute in monopolistic competition.

10. What is the acceptable bazaar anatomy of coffee shops in Hong Kong?

A Monopoly

B Oligopoly

C Monopolistic competition

D Absolute competition

SHORT QUESTIONS

What factor(s) enable(s) a bunch to acquire bread-and-butter profits in the continued run?

Why do altogether aggressive firms maximise their profits by bearing so that their bordering amount equals the price, but monopolists maximise their profits by ambience a amount that is greater than bordering costs?

What are the characteristics of a bazaar that allows a monopolist to auspiciously amount discriminate amid groups?

Explain how a abutting in an bunch can differentiate its product.

ESSAY QUESTIONS

1. Peter’s Toy Factory, a single-price monopoly, has the afterward appeal agenda and absolute amount for affluence toys:

Quantity (Toys)

Price ($/Toy)

Total Amount ($)

0

10

1

1

8

3

2

6

7

3

4

13

4

2

21

5

0

31

Calculate Peter’s absolute acquirement schedule.

Calculate Peter’s bordering acquirement schedule.

Calculate Peter’s profit-maximising levels of :

(i) output

(ii) price

(iii) bordering cost

(iv) bordering revenue

(v) profit

2. Mr Ma started a recycling business in Hong Kong this month. He employs acceptance to array and aggregate bottles, advantageous 10 cents for anniversary canteen collected. The acceptance can array the afterward cardinal of bottles in an hour.

Number Of Students

Number Of Bottles

1

200

2

450

3

750

4

1,150

5

1,450

6

1,700

7

1,900

8

2,050

9

2,150

(a) Why does the students’ bordering artefact decline?

(b) If all alternative firms pay the acceptance $25 an hour to aggregate bottles, how abounding acceptance will Mr Ma hire?

If the fee for anniversary calm canteen rises to 12.5 cents and the students’ accomplishment increases to $37.50 an hour,

(c) Calculate and appearance the changes to the students’ bordering acquirement artefact in a table.

(d) How abounding acceptance will Mr Ma hire?

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