Quiz 10: Competitive Markets


Yes, the local phone service providers are likely to become a vigorous competitive market because initially there was a monopoly (no competition) but with the entry of new suppliers, the competition will increase. Market structure describes the competitive environment in the market for any good or service. Market structure is typically characterized by four important industry characteristics the number and size distribution of actual sellers and buyers and potential entrants, the degree to which products are similar or dissimilar, the amount and cost of information about price and quality, and conditions of entry and exit. This can have important consequences on the local voice phone service market. This competition will drive the product prices down as each competitor would like to outdo his rivals.

(a) Marginal cost is the change in total cost. The table has been formulated and shown below: img Marginal cost is calculated based on total cost. For example at output 3 marginal cost is 70 (205-135). In the same manner, at output 7 marginal cost is 125 (600-475). (b) The minimum marginal cost of newsprint is $50, so this also represents the minimum price necessary to justify supplying a single unit of output. (c) In a perfectly competitive market, P = MR. Therefore, Mankato will supply output so long as price at least covers the marginal cost of production. At a price of $75, Q = 3 units of output which can be justified because P = $75 MCQ=3 = $70. However, production of a fourth unit is not warranted because P = $75 MCQ=4 = $80. Similarly, Q = 6 could be justified at a price of $100 because P = $100 = MCQ=6.

Perfect competition is that competition which is characterized by large number of buyers and sellers, each selling a homogenous product. There is perfect information in the market regarding the product, its cost, and its quality. There is also free entry and exit of sellers in the market. In perfect competition, sellers generally earn normal profits in long run as there is a threat of new entrants in the market. That is why these sellers have to accept the prices whatever given by the consumers or buyer. Hence they are known as price takers instead of price makers. Practically absolute perfect competition does not exist. In fact, vigorous competitive markets exist. For example, many agricultural markets, unskilled labor market, commodity, stock, and bond markets are known to be vigorously competitive. Like, in agricultural egg market, the egg produced by a farmer is homogenous. Therefore, farmers cannot charge high prices for it as there are many other producers in the market. Hence, a farmer will be a price taker. In the same manner a market of milk producers like Amul, cannot charge exorbitant prices from consumers, as it is a vigorously competitive market.