The following are the features of the four primary market models:
Monopolistic competition entails differentiated products, relatively free entrance, and a large number of enterprises.
Pure competition - Has free access into the market, a large number of enterprises, price takers, and no price control.
Monopoly - No free entry, one business, price control, price makers, and unique items with no substitutes.
Oligopoly is defined by a small number of enterprises, barriers to entry, non-price competition, and product differentiation.
The automobile and steel industries are examples of oligopolistic markets. This is due to the market's scarcity of differentiated products from automakers and steel companies. Their sizes also make new entry difficult.
Hometown supermarket and commercial bank fit in a monopolistic competition model since there are a higher number of supermarkets and banks in an area. Although they might appear similar, their services are differentiated.
Kansas wheat farm falls under pure competition because there are a lot of similar farms with neither price controls nor non-price competitions (McConnell, Brue & Flynn, 2012).
Question 3
The economic loss by remaining in business in the short run is less than the economic loss when the firm shuts down. This situation is acceptable only when the Prices are greater than the average variable cost. The firm gains revenue by operating to pay all variable costs and gets an additional amount to pay part of fixed costs.
Question 4
The MR = MC Rules is a profit maximization guide used by firms to compare the marginal cost and revenue of each extra output unit. A firm should produce an output unit which yields a lower marginal cost than the marginal revenue for it to remain in operation. Therefore, since MR – MC gives profit, an additional unit produced will not have an impact on the profits at the point where MR = MC. However, in a competitive market, the price can be substituted for marginal revenue in the rule since the prices are constant and the demand curve is perfectly elastic (McConnell et al., 2012).
Question 6
In a perfectly competitive market, a firm remains in operation when the variable cost is lower than the price. This is because it can cover its variable cost and have additional revenue to cover part of the fixed costs. Otherwise, the firm shuts down when the income received cannot cover the average variable cost. According to McConnell et al. (2012), if the market condition does not improve, then the business can exit the industry if the revenue collected cannot cover the total production cost. Thus, the firm will neither incur fixed nor variable costs.
References
McConnell, C., Brue, S., & Flynn, S. (2012). Economics, Brief Edition. McGraw-Hill Higher Education.
