Competition and Markets



Competition and Markets

Demand curve facing a monopoly firm and the demand curve facing a perfectly competitive firm

The primary difference between the demand curve of perfectly competitive firm and monopolistic firm is that the monopolistic firms are the price setters or have the capability and capacity of setting price in the market where as the competitive firms are price takers only.

The demand curve faced by a perfectly competitive firm is graphed as below:

The demand curve in a perfectly competitive market is exhibited by a straight line because it is considered as a perfect market, where all buyers and sellers have equal set of information therefore no one has competitive advantage over others to raise price level and price remains same that is why the demand curve remain the same. On the other hand monopolistic firms have the capability to set the price level of goods and services offered. The demand curve of perfectly competitive firms is perfectly elastic because they have variety of substitutes available in the market where as the monopolistic firms offer goods and services that don't have any substitute in the market and buyers have no other choice to purchase any other product instead. The demand curve of monopolistic market is downward sloping as the price for good is determined by the manufacturer. Both the firms have the same goal of attaining maximum profit. Monopolistic firms have the market power as compare to perfectly competitive firms.

The demand curve for monopolistic firm is graphed as below:

The demand curve of monopolistic firm is downward slopping because the price is determined by the producer of goods and services therefore if they increase the price of the good, the consumers will purchase the less of the product so there is a negative relationship between price and quantity demanded for a monopolistic firm (Investopedia. N.d.).

Perfect Competition

Perfect competition is a market that is very ideal in economics. However, perfect competition may never exist in the real economy. We know that perfect completion is based on five assumptions, which are described as follow:

There are many buyers and seller sin the market and none of them has a control over price.

The producers and sellers in the perfect market produce a product that has perfect substitutes available in the market.

There is an easy and free entry in the market and can exit as well easily. It is assumed that there are no strict and particular restrictions from government to enter into market.

The price cannot be influenced by both buyers and sellers.

Buyers and sellers both have adequate information pertaining to goods and services being offered.

In case a product being bought and sold in a market meets all the above assumption then it can be said that the product is perfectly competitive or the sellers and producers of the product in the market are price takers.

Therefore, egg is considered as a standardized product that is it is identical to other products available at outlets of other sellers. So it can be said that ...