Question

A. Answer the theoretical questions below

a. Explain the different types of market structures using both graphs and verbal explanation. Provide a specific example of each market.

b. Why monopolies arise and what governments can do in face of monopolies?

c. Explain briefly how the price floor works in a market if the government applies it. Use a specific real life example to argue for the application of it.

Answer 1

1. There are basically 4 types of market structure prevail in the market. perfect competition, Monopoly, Monopolistic, and oligopoly.

a) Perfect competition: it is a state of the market with free entry and exit, perfect information to the consumer, selling a homogeneous product, the price will be decided by the market and the ATC will touch its minimum point on MR=MC=P. so there are no chances of exploitation of customers.

b) Monopoly: it is a state of market where the seller is the single operator in the market with entry restriction. there is no benefit to the customer as the customer has to accept the price decided by the seller. there are chances of discrimination. the seller will earn an excess profit.

c) Monopolistic competition: it describes the market with condition-based entry. Customers will find homogeneous products with product differentiation. here in this market, we can expect 3 conditions for the seller as excess profit, normal profit or loss. generally, in the long-run, it attains a normal profit.

d) Oligopoly: it is the market where only few no. firms will operate with homogeneous products. there may be the chances of collusion or market leader following. here the entry is restricted and the price will be decided by the group or by the market leader. here the kinked point plays a significant role to justify the market price and supply of quantity.

2. When there is one supplier and the market is big at that situation the monopoly came to the scenario. so the nature of monopoly is the restricted entry and high price with limited supply. so the customer needs to pay a high price for the product. so the intervention of the government will be celling the price which will restrict the operation of monopoly. in the US it is popularly known as antitrust law. it is to protect customer from the unfair practices of monopolists.

3. A price floor is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. so if there is a government intervention in this aspect that may be related to the necessity of the product. for example the price of food items that are necessary for day to day life. if the supplier will hide it and charge a high price to gain high profit, at that situation government will take action and put a low price to make it available for all needy people. in reverse, if the price of a commodity will decrease below its production cost then government will decide the price of the product and make a stable price for that product to keep the farmer/producers interest.