(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...

(a) Two features each.

Perfect competition:

• There are very many buyers and sellers, so no single one can influence the market price.
• The product is homogeneous (identical), and there is freedom of entry and exit with perfect knowledge of the market.

Monopolistic competition:

• There are many sellers, but each sells a slightly differentiated product (through brand, packaging or quality).
• Product differentiation gives each firm some limited control over its price, and there is freedom of entry and exit in the long run.

(b) Price taker and price maker.

• A firm is a price taker when it must accept the price set by the market and cannot influence it, because its output is too small a part of total supply. This describes a firm in perfect competition.
• A firm is a price maker when it has power to set or influence its own price by varying its output, as with a monopolist or a firm selling a differentiated product.

(c) Sources of monopoly power.

1. Acts of parliament: the government may pass a law granting a firm the sole right to supply a good or service (for example a state utility), legally shutting out competitors.
2. Copyright (and patents): legal protection gives the creator or inventor the exclusive right to produce and sell a work or invention for a period, preventing others from copying it.
3. Natural monopoly: where a single large firm can supply the whole market at lower average cost than several firms (for example water or electricity distribution) because of very high fixed costs, so competition is wasteful.
4. Cartel: an agreement among separate producers to act as one by fixing price or output (for example OPEC), giving the group combined monopoly power over the market.