M212064104 - Individual Assignment - Mii1023

INDIVIDUAL ASSIGNMENT
COURSE MICROECONOMICS
CODE COURSE M111023
LECTURE NAME MUHAMMAD BAQIR ABDULLAH
STUDENT NAME MUHAMMAD AMEER AQIL BIN MOHD SUKREY
NO MATRIC M212064104
DATE SUBMIT 24/11/2022

INDIVIDUAL ASSIGNMENT
CHAPTER 6
1. Explain the characteristics of a perfect competition market.
(18 marks)
1. Large number of buyer and sellers
The large number of firms or sellers will cause each individual firm to be relatively small
compared to the market.Thus, each firm will have a relatively small contribution to the
total supply of goods in the market.
Therefore, individual firms or sellers are not able to control the market price.The actions
of one individual firm will not affect the market price.A firm can only change the quantity
it supplies without affecting the market price.
The large number of buyers will cause each individual buyer to become relatively small
compared to the market.This means that each individual consumer’s purchase and demand
will form a small part of the market demand.
2. Homogenous or identical product
Consumers consider the products of individual firms in an industry to be identical or

homogenous.When individual firms produce identical products,consumers do not have a
preference for a particular firm’s products and local preference does not occur.
Identical or homogeneous production ensures that no firm is able to set its prices higher
or lower than the market price.
If a seller raises his/her prices above the market price,customers will switch to other
firms.However, if a seller reduces his/her prices below market price, he/she will suffer
losses in the long term.
3. Free entry and exit
Individual firms in a perfectly competitive market are free to enter and exit a
market.When firms in a market generate supernormal profit,they cannot prevent new firms
from entering the market.Therefore, in the long term, only efficient firms will remain in the
market.
Firms in the market are also free to exit or leave the industry to join another industry if
they suffer losses.
The characteristics of freedom of entry and exit ensures that there is always a large
number of firms in the market.Therefore, all firms only generate normal profit in the long
term.
4. Non-price competition
Since individual firms produce only a small fraction of total output,they cannot control
the product price.The price is pre-determined by the industry and firms can sell as much or
as little as they want at the market price.Thus, the competitive individual producers are
price takers, for example unable to alter market price but can only adjust to it.
5. Perfect knowledge of the market
Each firm has perfect knowledge of production costs and fixed prices in the market, and
buyers have perfect knowledge about the prices set by individual firms in the market.
Perfect knowledge ensures that there is only one fixed price in the market. Firms will not
sell at higher or lower price compared to the market price.Buyers will not buy goods at a
price higher than the market price.
6. Perfect mobility of factors of production
All inputs or factors of production can be moved from one sector to another with no
barriers.
Factors of production are not controlled by monopoly of any firms or sectors.Laborers
are free to move from one firm to another or from one job to another at no cost.
Perfect mobility or factors of production ensures that all firms in a market can buy the
same types of factors of production at the same price.
2. Using a suitable diagram, describe equilibrium perfect competition in short-run as
following: (32 marks)
a. Supernormal profit
b. Normal profit
c. Subnormal profit
d. Shut down point
e.g. answer
a. supernormal profit
● Equilibrium condition MC = MR
● TR = AR x Q = 20 x 100 = 2000
● TC = AC x Q = 15 x 100 = 1500
● Profit= TR-TC = 2000-1500 = 500 (super normal profit)
b. normal profit
c. subnormal profit
d. shut down point

3. Explain the characteristics of monopoly firms. (12 marks)
1. Single seller
There is a single seller or producer or firm such that the market consists of just one
seller.It would imply that the buyer has to buy from that particular seller because the
product is not produced by other sellers.Notice that the seller (or firm) and the industry (or
market) are synonymous.
2. The product has no close substitutes
The product has no close substitutes from other producers.The product is clearly
differentiated and unique as there is only a single product in the market .The simple and
systematic way to determine the condition of ‘no close substitute’ is by using cross-price
elasticity of demand.If none of the cross-price elasticity of demand is large, then none of
the potential substitutes is close enough.The firm can then be considered as a monopoly.
3. Barriers to enter and exit
In addition to the existence of only one seller of a product,another condition that must
exist at the same time is barriers to entry of a new firm.The barriers or restrictions are
usually in the form of financial,technological and other barriers that enable a firm to retain
its power of monopoly.These barriers create an additional cost for a potential entrant before
gaining entry to a market.
4. Firm is price take
A monopoly is a price maker.Because of no competition in the market,a monopoly firm

has the ability and market power to influence price.Furthermore,the firm is the industry
and faces the negatively sloped market demand curve for a product.As a result,the price
can be determined by the firm itself.If the monopolist intends to sell more of the product,he
or she must lower its price and versa.
5. Describe THREE (3) conditions of price descrimination. (6 marks)
Three conditions of price descrimination firstly the sellers must be able to separate the
market which means there must be different markets either geographically or conceptually.
Resale of product is not allowed.
Second, transport costs must be as low as possible so that the monopolist can maximize
profits.
Lastly, elasticity of demand must be different in different markets. The monopolist will
charge a higher price when the demand is inelastic and a lower price when demand is elastic.
If elasticity is the same, price discrimination is not possible.
6. Describe THREE (3) types of barrier to entry for new firms (6 marks)
Three types of barrier to entry for new firms are firstly government franchises and licenses.
A franchise monopoly arises when the government grants the exclusive right to do business in
a specified market to some individual or firm. For example, governments establish
monopolies for the right to sell transportation, communication services and the others.
Secondly, patents and copyrights. Patents and copyrights are given by the government in
order to protect or secure the work of authors, inventors and others to license the use of their
inventions and creations.
Lastly, ownership of the entire supply of a resource . A monopoly can also exist by owning
the entire source of supply of a particular essential input in a production process.

M212064104 - Individual Assignment - Mii1023

Uploaded by

Copyright:

Available Formats

M212064104 - Individual Assignment - Mii1023

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

M212064104 - Individual Assignment - Mii1023

Uploaded by

Copyright:

Available Formats

INDIVIDUAL ASSIGNMENT

CODE COURSE M111023

LECTURE NAME MUHAMMAD BAQIR ABDULLAH

STUDENT NAME MUHAMMAD AMEER AQIL BIN MOHD SUKREY

DATE SUBMIT 24/11/2022

1. Explain the characteristics of a perfect competition market.

1. Large number of buyer and sellers

2. Homogenous or identical product

Consumers consider the products of individual firms in an industry to be identical or

3. Free entry and exit

5. Perfect knowledge of the market

6. Perfect mobility of factors of production

d. shut down point

2. The product has no close substitutes

3. Barriers to enter and exit

4. Firm is price take

A monopoly is a price maker.Because of no competition in the market,a monopoly firm

You might also like