Microeconomic Principles

Microeconomic Principles

Competitive markets

A competitive market can is described as a market with a large number of suppliers and many buyers of a product. The concept further involves their being enough business for all suppliers and therefore no single individual considers another as competing for the customer or limiting his or her business in any way. Competition, however, is present in as far as there are changes in the prices and products offered to the prospective customer.


To understand the actual form of competition that exists in a competitive market structure, three conditions must be examined as they predetermine such a structure. These include the availability of the market in terms of both purchasers and sellers, homogeneity of the commodity under trade, and an infrastructure that caters for the production and distribution of this commodity. Homogeneity of product is a situation whereby the product sold by one supplier in the market matches the product sold by any other sellers. This factor alone has a crucial influence on the market. This is because the products of different sellers are indistinguishable (Pape, 2008). The people who purchase the products from the market do not care whom they buy from so long as the prices do not differ.

Existence of many buyers and sellers is another condition, which again results in significant outcome. A large number of buyers or sellers make it impossible for each individual buyer or seller to have any power to influence the price of the product under consideration in the entire market. Consequently, whether a person is a buyer or a supplier, it is a necessity to acknowledge the market price since they are all price takers and not price makers (Mankiw & Taylor, 2006). The product prices are established in the market hence individual buyers and sellers can only make a decision on how much to purchase or supply at the given market price. The third and the last stipulation is the perfect mobility of reserves. This involves a state where the infrastructure facilitating production can be altered for utilization in another manner. It is necessary for all buyers, sellers, and owners of resources to have to be informed on technological and economic data. The inference of this condition is that resources are utilized in industries, which are more profitable than others do.

In these competitive markets, the supplier has to take the market price as given as the supplier has the liberty to determine how much to produce and supply in the market. The supplier produces the quantity that that will maximize the profit for the firm. This is a point where marginal cost of production equals the market price. Market supply of the product and the total demand for the product are the determinants of market price. Since consumers receive a price that is equivalent to the production cost, consumers are well treated.

Monopolistic markets

Monopolistic market can also be depicted as perfect competition. It occurs in markets whereby no participant owns market power. This is because the conditions for perfect competition are strict, as there are few if any perfectly competitive markets. Generally, a perfectly competitive market exists when every participant is a “price taker,” and no participant influences the price of the product it buys or sells (Pape, 2008).


Some of the characteristics of monopolistic markets include, it has infinite buyers and sellers as consumers with willingness to buy the product at a specific prices and producers willing and able to supply the products at certain prices (Mankiw, 2008). There are no restrictions to joining or leaving a perfectly competitive market, thereby giving the business the control to do so freely. Prices and quality of products are known to all consumers and producers because in monopolistic competition there is perfect information. Firms also aim at maximizing profits by selling their products at prices where marginal costs meet marginal revenue hence generating most profit. In monopolistic markets, the characteristic of any given product do not vary, as the goods are homogenous.

Monopolistic market is a structure of perfect competition whereby many competing producers supply commodities, which are differentiated from one another. The products are substitutes with differences such as branding and they are not exactly alike. In monopolistic markets, firms dominate the market in the short-run. This is because they have market power in profit generation. On a long-term scale, there is a reduction in contest as other businesses also join the market. The characteristics of a monopolistically market in long run are just the same as in perfect competition (Pape, 2008). A firm making profits in the short run breaks even in the long run as its demand decreases and the average total cost increases. It implies that in the long run, a monopolistically competitive firm will make zero economic profit, which amounts to market dominance due to brand loyalty. Therefore, the firm can raise its prices without losing all the clients. Consequently, the individual firm’s demand curve is downward sloping.

In conclusion, monopolistic markets and competitive markets have similarities and differences. Generally, price and output decisions of a monopolist are similar to those of a competitive firm. The major distinction between the two is that competitive markets have a large number of firms under competition as compared to monopoly, which has only one firm. Thus, one can conclude that there is no competition under monopoly. On contrary in competitive markets, there is competition in the market. In both markets firms maximizes profits at a point where marginal revenue equals marginal cost.

A monopolist is a price maker and has the liberty to increase the sales by lowering the price. Consequently, a monopolist does not produce to the point where price equals marginal cost whereas in competitive market structure produces at that point. If a business operates in a monopolistic market environment, it experiences reduced output but compensates with elevated charges as compared to operating in a perfect competition environment. Therefore, a business and the society will always opt against a monopoly since the output is usually lower and the prices charged are higher. However, a natural monopoly is considered desirable if the monopolist’s price behavior can be regulated (Mankiw & Taylor, 2006).
















Works Cited

Mankiw, G., & Taylor M. Microeconomics San Francisco, CA: Cengage, Learning EMEA, 2006

Mankiw, G. Principles of Economics Cambridge, MA:  Cengage, Learning, 2008

Pape, J., Economics: An Introduction for South African Learners. Pretoria, South Africa: Juta and Company Ltd, 2000

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