Perfect Competition and Monopoly

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Question 3 Perfect Competition and Monopoly

I. Explain perfect competition and monopoly market structures, and identify the key factors that distinguish them.

Perfect Competition Market
In economic theory, the perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. According to the website, in order to classify the market is a perfect competition market, the market must match below criteria: 1. There are a large number of small producers and consumers on a given market 2. None of the producers or consumers can influence the price on their own (ie. Price takers) 3. Goods and services are perfect substitute (ie. The goods or services is homogeneous) 4. All resources are perfectly mobile

5. There is no transaction cost
6. The price is determined at the level that equates supply and demand, and moves instantaneously to equilibrium

Monopoly Market Structure
A monopoly market structure is completely different from the perfect market structure. It is a persistent market, with one and only supplier of the particular product or service. Since there is only one supplier, it can control the supply level, and therefore, it has the power to influence prices in the market.

Key factors that distinguish Perfect Competition Market and Monopoly Market Structure There are three main factors to distinguish a Perfect Competition Market and a Monopoly Market structures, which are seller entry barriers, number of sellers, and the nature of the products.

Seller entry barrier is one of the key factors. For Perfect Competition market, there is no or little barrier. For seller entry barriers, they include government regulations, patents, import/export restrictions or large investment and start up costs. According to Sloman and Norris (1997), there is complete freedom of entry for firms and established firms are unable to stop new firms entering the market.

Number of seller is also a factor to determine whether the market is a perfect competition market or a monopoly market. For a perfect competition market, the number of seller in the market is one, and there is no other competitors in the market. On the other hand, there are many sellers in the market, and each seller is competing against each other. Also, since there is a great competition in the market, it is more difficult to gain market share than it is in the monopoly market.

The nature of the product/service is another factor to distinguish between these two market structures. According to Duffy (1993), in the perfect competition market, the products sold as homogeneous since there is no differentiation between what the firms sell, and consumers are able to buy same product from many different sellers, at a similar price. However, in the monopoly market, the product is only available from a particular seller, and buyer cannot buy the product from other sellers.

II. Choose two different industries from your home country representing perfect competition and monopoly, and identify their key characteristics in relation to the factors used to differentiate between the market structures.

“Yum Cha” Market in Hong Kong
Food and Beverage market is one of the examples of Perfect Competition markets in Hong Kong, and there are many businesses in this market. The businesses in this market include restaurants, fast food stores, pubs, etc. “Yum Cha” is synonymous with eating Dim Sum, and it is a Cantonese Cuisine, which is very popular in Hong Kong, therefore, the “Yum Cha” market is very large in Hong Kong. To prove that the “Yum Cha” market is a perfect competition market, three factors will be used, which are seller entry barriers, number of sellers, and the nature of the products.

For “Yum Cha” Market, seller entry barrier is very little. To setup a restaurant in Hong Kong, entrepreneur need to ensure the business meets the hygiene and fire safety...
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