Perfect competition, monopolistic competition, oligopoly and monopoly Essay - 1

Perfect competition, monopolistic competition, oligopoly and monopoly - Essay Example Thirdly, an oligopoly comprises of few firms. When these firms merge, they reduce output to allow them raise their profits as in the case of a monopoly. In doing so, they produce output that creates incentives for cheating in the case of collusive agreements, ending up competing with each other. Fourthly, a monopolistic competition entails many firms competing against each other, each producing a slightly different product. This paper will depict the traits of different types of market, their differences, similarities, and economic efficiency of outcomes under perfect competition and monopoly. The major traits of perfect competition include prevalence of many small firms, all organizations selling identical products, free entry and exit to the market, and perfect knowledge regarding the prices and technology in the market. These traits mean that it is not possible for a firm to exercise any form of control in the market. Since the large number of firms sell identical products, a broad range of perfect substitutes prevail based on the output of a given organization. As such, the demand curve for the firms in a perfectly competitive market is perfectly elastic (Dransfield, 2013). Since firms are free to enter the market, this means that resources such as capital are perfectly mobile. As such, it is not possible to impose barriers of entry into the market. With regard to the issue of perfect knowledge, it is true that organizations operate in a similar environment. As such, consumers are aware of the perfect substitutes prevalent in the market for a certain good, especially since firms produce matching products (Stackelberg, 2010). In a perfect competition market, the industry and market forces determine the prices and output. The price is set by the market forcing firms to adjust their prices based on equilibrium position of firms as shown by the figures below. In the first figure, the demand and supply curves interest at point E.