Firms ProFit In Competitive Market

Task A

In perfectly competitive market, firms are the price takers as there are many firms; each of them has very little influence to change the price in the market. Products of these firms are homogeneous and there is unrestricted freedom of entry. The price elasticity of demand is perfectly elastic in these firms so that any increase in price would leads to no sales and any drop in price would leads to no profit (Smith 2014).

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(economicsonline nd)

In short run, firms could make abnormal profits. However, in long run, firms could only make normal profit because we assume that in a perfectly competition market both producers and consumers has perfect information towards each others' willingness to sale or purchase, and also the cost of production, and therefore in long run supply curve will shift to the right and exhaust abnormal profit to normal profit.

However, it is very difficult to achieve perfectly competitive market in real life as it requires 3 crucial conditions. First of all, asymmetric information, which is perfect information in both consumers and producers, it is very difficult to achieve as it is impossible for consumers to know all the costs of production and in real life the producers always holds more information. Secondly, all products are homogeneous. But in real life products are rarely the same, for example, crops' quality might differs because of the quality of soil in different region, homogeneous products are usually produced in markets with small numbers of firms. Lastly, barriers of entry, theoretically perfect competitive market should have no barriers of entry but in real life it rarely occurs as to set up any business requires an amount of money to set up.

In monopoly, there is only one firm in the market, their products have no close substitutes and therefore the firms are the price makers and also high barriers to enter the market. (Smith 2014) And because the monopoly is the only firm in the market, the demand curve of monopoly response directly to the market demand and therefore has a downward slope. Also because it is the only market, it has a larger influence to the price of product and can pick a price to produce on the demand curve.

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(economicsonline nd)

Monopoly always seeks for profit maximization, were MR=MC. The abnormal profit is shown in the shaded area. If the product doesn't have any close substitutes, the demand curve would be more inelastic and the profits will increase. Also as mentioned before the demand curve in monopoly response to the market demand directly, so an increase in demand will leads to shift of MR and AR to the right and any decrease in demand will leads to shift of MR and AR to the left.

One of the most recognizable examples of monopolies in real life is the Microsoft, its main product is the Window System, which there're no substitutes besides Mac from Apple. Also the cost of entry is relatively higher as it requires lots of investment, equipment and highly educated technician to create a computer operating system. Microsoft is one of the biggest monopolies It has almost 90% market share in the late 90s. It's so powerful that the US has to interfere and was put on court. "Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products," the judge wrote.(BBC 1999)