Market Competition

In: Business and Management

Submitted By wiggins
Words 685
Pages 3
Submission Question 13

Assume that a market was served by an industry which was perfectly competitive when one of the firms was able to gain exclusive control of an essential input so that all of the other businesses closed down leaving the owner of the raw material as the sole supplier in the industry.

Assume that there is no change in the demand for the product and that all the costs of production remain the same.

a. Use the demand and supply model to show if there is likely to be any significant inefficiencies in production and allocation of the economies resources when there is only a single firm supplying the industry.

b. Are there any circumstances when the single firm can lead to an efficient allocation of resources? Give reasons for your answer.

a.

A perfectly competitive market is defined by the following assumptions:

1.There are many buyers and sellers

2.Firms produce a homogenous product

3.Buyers and sellers are fully informed about the price and availabilty of resorces and products

4.Firms enjoy free entry and exit from the market

5.All resources are completely mobile

6.Firms seek to maximise economic profit, and consumers seek to maximise total utility.

In this market, individual participants have no control over the price, and are said to be price takers. An imperfectly competitve market is one in which firms have some ability to set their own price, and one form is the monoploy. A monoploy is a market in which a single firm is the only supplier of a product for which there are no close substitutes. Monopolies can be created by economies of scale, exclusive control of an input to production and government regulation which all pose as barriers to enter the market.

Allocative effieciency can be defined as the condition that exists when firms produce the output that is most preferred by…...

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