Competitive Market Scenario- Free-Samples-Myassignmenthelp.com

Questions: 1.Explain why this scenario is considered bad for the economy and what are the possible explanations for the weakening of Competition? 2.Use simple demand and supply analysis to show how a monopolist can affect total welfare. 3.What does Schumpeter suggest as solutions to Improve Competition? Answers: 1.There is huge competition among the large number of sellers in the competitive market scenario (Baumol Blinder, 2015). Each firm tries to keep hold over the maximum share in the market. In doing so, the firms innovate and implement new technology and methods to reduce their cost and enjoy higher profits. Due to increase in the Competition, financially weaker firms exit the market or change their product line, reducing the competition (Varian, 2014). When this happens, the firms still existing in the market stop investing in newer technology and hoard the profits rather than investing it. Because of this, the workers or the laborers get reduced wages and consequently the demand is affected in the market. When this happens, some of the sellers exit the market which leads to a reduction in the competition and leads to a Monopolistic Situation which is not favorable for the consumers and the Society at large. The reduction in the competition can also be due to an increase in the inter vention of the Government for regulating the market. Government intervenes when it feels that its non-intervention would lead to a situation where the larger firms will start dominating the market. Due to the intervention of the Government, the firms start feeling that their growth is being restricted and their objective of attaining economies of scale is being hindered, this is the reason as to why some of the firms leave the market leading to weakened Competitive Environment. 2. Figure 1: Social cost in a Monopoly Market The above diagram represents the market scenario both under a competitive and monopoly market. The demand and the supply curve are DD and SS respectively. The marginal cost faced by the monopolist is the same as SS. Equilibrium in the competitive market is at point E where the market demand curve cuts the market supply curve. In other words, this is the point where price equals marginal cost. P* is the corresponding equilibrium price. At this price Q* quantity will be sold. However, the equilibrium condition in the monopoly market is different from that of a competitive market. The necessary condition of equilibrium is Marginal Revenue (MR) = Marginal Cost (MC) (McKenzie Lee, 2016). This can be shown in the above diagram. At the monopoly market equilibrium, the market price rises to P1 and the quantity supplied reduces to Q1. Thus, it can be derived that for a Monopolistic Market, reduced quantity of products are supplied at higher prices. It reduces the surplus received by the cons umers when there are intense competitions among firms. The monopolist (Friedman, 2017) enjoys part of the lost consumer surplus and rest is counted as a welfare loss to the society. Thus, the Aggregate Welfare is reduced. The shaded region represents the dead weight loss attributable to society. 3.Schumpeter, the economist, suggested opting for the 3 Stage Strategy for overcoming the situation. A highly motivated public campaign can force the politicians change the decisions they made. During the 1920s, the combined action from the Monopolist led to significant reforms. Significant amount of Power was provided to the Technocrats with the formation of the Anti-Trust Law. Only a brave move was required from them. The experiences gathered in Chicago School should be a lesson for the Scholars of the Society. Americans should give focus on the importance of Competition for the consumers as well as for the whole society. Following the strategies, it can be anticipated that the situation would be improved in the future. References Baumol, W. J., Blinder, A. S. (2015).Microeconomics: Principles and policy. Cengage Learning. Friedman, L. S. (2017).The microeconomics of public policy analysis. Princeton University Press. McKenzie, R. B., Lee, D. R. (2016).Microeconomics for MBAs: The economic way of thinking for managers. Cambridge University Press. Varian, H. R. (2014).Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton Company.