Perfect competition and monopoly

Published on September 26, 2019   25 min

Other Talks in the Series: Introduction to Microeconomics

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Hi. I'm Dr. Sangaralingam Ramesh, welcome to talk Number 11 in this Henry Stewart talks "Introduction to Microeconomics" series. In this talk, we'll be looking at "Perfect Competition and Monopoly", and seeking to answer questions such as, what is a perfectly competitive market and a monopoly? And what is their relevance to the consumer?
So in these series of talks so far, we've been talking about microeconomics and specifically market equilibrium where each market exist for specific types of goods. We've also talked about consumers, we've talked about producers in the context of consumers, we've talked about indifference curves, and budget lines, and consumer optimization. For firms, we've talked about isoquants, we've talked about isocost lines, firm optimization in terms of production and how firms minimize costs. We're now going to take a look at market structures and how firms may be organized in the market, and we'll be starting off with a perfectly competitive market.
In the case of a perfectly competitive market, economists make a number of assumptions. Firstly, that there are many small buyers and sellers. This assumption is necessary in order to ensure that no buyer or seller is big enough to affect the price of the good which is set by total market supply and demand for the good. In which case, each firm is a price taker and has to accept the price which is set by the market. The second assumption that economists make in the case of a perfectly competitive market is that all firm sellers are identical or an homogeneous product. The third assumption that the economists make is that, there's perfect information in the market, so all consumers know about the quality and price of goods sold by all firms in the market, and all firms know about the costs and revenues of other firms as well as the price at which other films are selling their goods. The last assumption which economists make is one of free entry and exit. In other words, it's costless for firms to enter the market and to exit the market. This assumption is necessary when we make distinction between the short run and the long run. In the short run, firms in a perfectly competitive market will make supernormal profits, but in the long run, more and more firms will be able to enter the market and those supernormal profits are eroded such that each firm is making normal profits where total revenue is equal to total cost. In the case of supernormal profits, in the short run, the firm's total revenue is greater than total costs, but in the short run when firms in a perfectly competitive market are making supernormal profits, this acts as an attractant for firms outside the market to enter the market which is why the assumption of free entry or costless entry is required.