(a) State two features each of:
(i) perfect competition; (ii)monopolistic competition.
(b) What does it mean for a firm to be a : (i) price taker; (ii)price maker?
(c) Explain the following sources of monopoly power: (i) acts of parliament; (ii) copyright; (iii) natural monopoly; (iv) cartel
Explanation
(a) Perfect competition:
(i) Large numbers of buyers and sellers such that no single seller or buyer can influence the price
(ii) Free entry and exit such that there is no barrier to entering or leaving the market.
(iii) Common price rules the market because price is fixed by the forces of demand and supply
(iv) Homogenous product (the same product) is sold by all sellers in the market
(v) There is perfect knowledge about prices prevailing in the market by both sellers and buyers.
(vi) Absence of government control. Government does not interfere in the activities of the market
(vii) No preferential treatment as sellers and buyers are indifferent as to whom they buy from or sell to.
(viii) Identical cost conditions exist as there are no transport costs that may influence price.
(ix) There is perfect mobility of factors of production since producers can easily move from one line of production to another without hindrance.
Monopolistic competition:
(i) There is a large number of sellers but each seller chooses his own market strategy.
(ii) Products are differentiated by branding, packaging, weight so that they are not homogenous.
(iii) Any firm can enter with a variety, or exit if it is not making profits
(iv) There is a large number of buyers with their own preferences
(v) Different prices rule the market i.e. each firm is a price maker controlling a portion of the market
(vi) It faces a downward- sloping demand curve.
(b)i. A firm is a price taker if its output is only a small fraction of the total output of the industry and thereby exerts no significant control over the price of the product in the market i.e. if it is a perfect competitor. OR The price is determined by the forces of demand and supply.
ii. A firm is a price maker if it controls the entire output or a major part of the output of the industry i.e. if it is a monopolist or a monopolistic competitor. Such a firm has considerable control over the price of the product in the market.
(c)i. Acts of parliament - This is power conferred by law on a firm to be the sole producer or supplier of a particular commodity
ii. Copyright - This is a legal right granted to the producer or seller of a book, play, film or song to be the sole seller for a specific period of time.
iii. Natural monopoly- A situation which makes a firm (because such a firm owns a unique raw material, technology of some other factor), supply a market's entire demand for a good or service, at a price lower than two or more firms can e.g. the utility firms
iv. Cartel - A cartel is an agreement between two or more producers of the same commodity to regulate the production and sale of the product with a view to obtain dominance in the market e.g OPEC.