Explain how the different features of monopolistic competition and oligopoly affect price and output determination in these market structures. [10]

This is a special contribution by WY in response to the ‘A’ Level H2 Economics November 2011, Essay Question 3 on monopolistic competition and oligopoly

This paper explains how the characteristics of the monopolistic competition and oligopoly firms account for their levels of price and output. There are five main characteristics which serve as assumptions for these two market structures. They include the number of buyers and sellers in the market, type of product sold, level of barriers to entry, price setting ability of the firms, and information level. These traits of each market structure would determine what level of price and output they produce at.

A monopolistic competitive firm refers to a firm that sells a slightly differentiated product with many close substitutes, in a market with many buyers and sellers, with relatively low barriers to entry and exit of the market, and imperfect information in the market. We take each of the features to be explained in turn. Product differentiation can be based on real or imaginary differences. Real differences mean that the product is actually different in terms of its design, composition of materials, and substance. Imaginary differences, on the other hand, mean that the product is perceived to be different, due to persuasive advertising, branding, and marketing differences, which create a psychological difference. Monopolistic competitive firms are price setters, but have limited price setting ability due to the presence of many other competitors in the market selling differentiated but similar products.

What economics diagram would you draw here, and why?

According to the diagram, a profit maximising monopolistic competitive firm would produce at marginal cost (MC) = marginal revenue (MR), at price P and output level Q. In the short run, the firm could earn supernormal profits as long as average cost (AC) is below P. However, in the long run, because of the relatively low barriers of entry and exit of the market, the supernormal profits of the short run would be competed away due to many competitors entering the market. Therefore in the long run, monopolistic competitive firms earn normal profits.

A monopolistic competitive firm operates in a market with many buyers and sellers. Barriers to entry refers to any man-made or natural barriers to entry which are strong enough to prevent new rival firms from competing on an equal basis with existing firms, and prevent these firms from entering or exiting the industry. There are two types of barriers to entry, namely natural and artificial barriers to entry. Natural barriers to entry refer to barriers which are intrinsic to the industry, such as economies of scale. Artificial barriers to entry refer to laws, legislations, patents, and other obstacles to entering or exiting an industry, and are not intrinsic to an industry itself. Low barriers to entry and exit of a monopolistic competitive industry also allows potential entrepreneurs to capitalise profitable opportunities by providing easy access into the market, resulting in the presence of many sellers in the market. These conditions – many buyers and sellers in the market, low barriers to entry and firms selling slightly differentiated product – coupled with imperfect information in the market allows for  monopolistic competitive to have limited price setting ability. 

An illustration of monopolistic competitive firms would be chicken rice stalls located in the multitude of food courts and coffee shops in Singapore. There are many consumers of chicken rice and many chicken rice sellers, each selling a slightly differentiated form of chicken rice – Hainanese chicken rice, and lemon chicken rice, for instance. Low barriers to entry exist because of the relatively low rental and start-up costs of chicken rice stalls in coffee shops, as compared to those of restaurants, which would have to spend relatively more to hire more qualified employees such as chiefs and waiters for instance. Imperfect information could be illustrated in the form of special recipes withheld by different stall owners, and this coupled with the abovementioned conditions, allows for each chicken rice stall to have small market power and thus some degree of price setting ability. These conditions together, results in monopolistic competitive firms producing at MC=MR, at price P and output level Q and earning normal profits in the long run.

On the other hand, an oligopoly refers to a firm that sells either a homogenous or differentiated product depending on the particular or specific industry, in a market with many buyers but relatively few sellers, each mutually interdependent on each other, with relatively high barriers to entry and exit of the market, and imperfect information in the market. Due to the high barriers to entry and market power of the firms, oligopolies are price setters with high degree of pricing power. Mutual interdependence means that each of the firm in a oligopolistic industry will take into account each other’s price and non-price behaviour when making their strategies. This strategic or game theoretic behaviour occurs because each firm in such an industry is not a competitor, but rather a rival to the other firms. Oligopolies can be either collusive or non-collusive, where collusive means that the firms act in a concerted manner and co-operate with each other, while non-collusive means that each oligopoly operates on its own accord, taking care to strategically consider their rival’s likely behaviour. As collusive oligopolies will form a cartel and behave just like a monopoly, it would not be discussed in this essay.

What economics diagram would you draw here, and why?

Non-collusive oligopolies also produce at the maximising point MC=MC, at price P and output Q. Taking into account their rival’s actions, these oligopolies would not raise their prices as their rivals would simply benefit from such actions. On the other hand, they would not lower their prices and cause a price war as their rivals would have little choice but to follow. According to the kinked-demand curve model, due to rival’s strategic behaviour and mutual interdependence, there would be a situation of sticky prices at price P, where oligopolies would not have any incentive to raise nor lower prices. The only way in which a price war is sustainable is if the MC curve fell for a firm, due to innovation or dynamic efficiency. That way, an oligopoly could lower its prices and trigger a price war with the other firms, and if its rivals are unable to match its lower marginal costs, it would win in the long run. Therefore, due to high barriers to entry and market power of the firms, oligopolies earn supernormal profits in the long run.

Non-collusive oligopolies operate in an industry where there are many buyers but relatively few sellers, due to high barriers to entry. This, coupled with imperfect information in the industry, and the type of product sold – homogenous or differentiated – results in oligopolies having a high degree of pricing power. In the e-commerce industry, examples of non-collusive oligopolies include firms like Amazon, Alibaba, eBay etc. Barriers to entry in the e-commerce industry is relatively high, because it requires a lot of capital to set-up the firm, such as the search engine required to cater to global demand, and the logistics required to handle the delivery and shipping of thousands of product worldwide. Hence, only a few oligopolies dominate this industry, each selling a myriad of differentiated products. Imperfect information could exist in the industry where firms have no information regarding the operations of their rivals, such as how they innovate for instance. Therefore, these five characteristics of non-collusive oligopolies lead to these firms producing at MC=MR, at price P and output level Q, thereby earning supernormal profits in the long run.

In conclusion, the five characteristics of the two market structures ultimately determine their pricing strategy and what level of price and output they produce.

JC Economic Essays – This is a H2 Economics essay response on a market structure question, for the N2011 economics examination, Essay Question 3. Special thanks once again to WY for his kind contribution, which will help many economics students learn economics through model economics essays. Thank you to WY and SS for their kind contributions of economics essays.

This economics answer is really good, albeit detailed. As a model, this essay is clearly structured, focuses on the features (“structure”) of the market structures (both of them), and argues about the resultant P and Q. There is a good and strong use of examples, and economics diagrams as well. This economics response also refers explicitly to the P and Q, which are the focus of the question.

Just for discussion and improvement: What could the author have done differently to make this economics essay sharper and more focused? What could he have done slightly differently, or better, to make improvements to his response? There is always room for improvement. Always think of how you could have approached the economics question, and what you could have learnt from reading this model essay, and from other economics essays on this site. What synthesis or syntheses can you make? 

Thank you for reading and cheers.

Discuss how far increased specialisation and low barriers to entry apply to the growth of online shopping. [15]

Internet or online shopping has grown rapidly in recent years. Low barriers to entry have allowed a wide range of small specialised retail firms to market their products on the Internet. At the same time economies of scale have led to a small number of large Internet retail companies dominating the market for other products.

Increased specialisation and low barriers to entry have an impact on consumers and existing producers.

Discuss how far the traditional analysis of these economic effects applies to the growth of online shopping. [15]

An economics student’s response to the H2 ‘A’ level Economics November 2012 Essay Question 3

Part (b) of the H2/ A level Economics N2012 Essay Question 3 is kindly contributed by WYWS

This paper argues that while increased specialisation and low barriers to entry are able to account for the growth of online shopping, there exist other equally important theories in which the online shopping industry could expand. These other ways include online shopping retailers growing internally by expanding over time, or by growing externally by integrating with other firms via mergers, acquisitions and takeovers. Besides growing, alternative theories of firms postulate that aside from maximising growth, real world firms may aim to maximise profits or revenue.

Increased specialisation refers to the division of labour, and thus economies of scale. In the long run, rational profit-maximising firms aim to produce at the minimum efficient scale (MES), the point where the long run average cost (LRAC) curve shops falling, or where economies of scale are first exhausted.

Draw relevant economics diagram here – what diagram should be drawn?

This aim allows the firms to minimise the possibility of being undercut by their competitors, while giving them the ability to undercut their competitors. By reaping economies of scale, firms are also able to obtain cost advantages unavailable to their competitors, which allows them to lower their cost of production, produce more output, and thus increase their profits. A form of division of labour could be dividing one software engineer’s job of maintaining the integrity of the website and formulating creative new ways to improve the website into a job for two people, such that each could focus more intensively on their job scopes, thereby resulting in a higher quality and quantity of output. By increasing specialisation, firms could therefore reap economies of scale and ultimately promote growth.

Besides increased specialisation, low barriers to entry could also lead to the growth of firms in the online shopping industry. Entrepreneurs are decisive risk takers, who seek to coordinate the factors of production of land, labour, and capital, to bring out an increase in output from a given input. Low barriers to entry – both artificial and natural – allow potential entrepreneurs to capitalise profitable opportunities by providing easy access into these profitable segments of the market. The entry of new competitors would therefore apply pressure on incumbent firms, lowering output prices, and improving the overall allocation of resources. Low barriers of entry and exit of the market would therefore ensure that firms which are efficient and producing in accordance to market demand would survive and prosper in the market, while firms which are inefficient and whose production are not geared to the market would face their demise.

Other than increased specialisation and low barriers to entry, firms in the online shopping industry could grow by expanding internally over time or externally by integrating with other firms. There exists three types of integration, namely horizontal, vertical and conglomerate integration. Horizontal integration occurs when two firms that are producing the same product, or are engaged in the same stage of production, combine to form one entity. Vertical integration occurs when a firm in a stage of production combines with another firm from another stage of production, and consists of forward and backward integration. Forward integration occurs when a firm integrates with another firm at the next stage of production. Backward integration occurs when a firm integrates with another firm at an earlier stage of production. E-commerce oligopoly Amazon for instance, would have undergone vertical integration, as it does not only provide the service enabling consumers to search for products online, but also handles the logistics of delivering the product to the consumer’s doorstep. Conglomerate integration occurs when a firm mergers or acquires another firm from an unrelated industry.

Aside from expanding internally or externally, there exists several alternative theories of the firm which theorise that firms maximise profit and revenue, besides maximising growth. Maximising sales revenue increases the firm’s market share, which increases the prestige of the firm’s managers. Maximising growth via maximising output incurs additional costs such as advertising, investment, and research and development, but this would pay off in the long run with an expansion of demand and capacity. The behavioural theory of the firm by Cyert and March uses Herbert Simon’s theory of bounded rationality necessitating satisficing to argue that real world firms aim for satisficing behaviour, and proved this with real world empirical data. Satisficing refers to managers aiming to achieve other objectives by maintaining a satisfactory level of output to keep shareholders happy, rather than maximising growth. The managerial theory of the firm by Baumol and Williamson argues that managers seek to maximise their own utility rather than maximising growth. Bearle and Means argued regarding the ownership and control of the firms, where ownership of the firm is often spread over a large number of shareholders, and conversely control of the firm is often in the hands of a few managers.

Draw relevant economics diagram here – what diagram should be drawn?

According to the diagram above depicting a monopoly, firms can choose to maximise profit, revenue, or output, all of which would result in different levels of P and Q to be chosen, depending on the aims and objectives of the mangers. To maximise profit, managers aim to produce at marginal cost (MC) = marginal revenue (MR), at price P1 and output Q1. To maximise revenue, managers aim to produce where MR=0, at price P2 and output Q2 and still earn supernormal profits. To maximise growth, mangers aim to produce at average cost (AC) = average revenue (AR) and earn normal profits. Hence, applying this to oligopolies and monopolistic competitive firms in the online shopping industries, these firms could choose to maximise profits or revenue instead of maximising growth.

In conclusion, traditional analysis of increased specialisation and low barriers to entry are not as effective as alternative theories of the firm in analysing the growth of online shopping. The reason being is that the online shopping is a relatively new concept, since many consumers only have access to fast, reliable Internet post 20^th century. Therefore, imperfect information largely exists in such industries as compared to real world industries such as agriculture, thereby rendering traditional economic theories on the growth of the former being less accurate and reliable to alternative theories of the firm. However, these traditional analysis are still useful in certain cases, and therefore it is vital to keep them in our economic analysis toolkit.

JC Economics Essays – Special thanks to WY for his excellent contribution of a well-argued, well-written, and clearly-worded economics essay on the H2 / A level economics November 2012 examination essay question on market structure, economies of scale, barriers to entry, alternative theories of the firm, and internet retail firms.

Covering a lot of good economics material, this exemplary economics essay is an excellent model essay on how to effectively tackle examination questions. It succeeds greatly by using various economic theories and examples, and relevant economics diagrams, all targeted at making a reasoned, reasonable, and rational response to the economics essay question. This economics paper would easily achieve a grade A from an economics tutor during an examination. What else can you learn from this essay? 

Thank you for reading and cheers! 

Consider different retailers in Singapore & discuss which of these two market structures best explains their market behaviour. [15]

This economics question has been adapted and answered in several posts already on JC Economics Essays. This economics essay response by WY is another attempt at responding to this A level / H2 economics question. Special thanks to WY for his contribution, and to SS for his editing and vetting of this response. 

This paper examines the conduct of monopolistic competitive and oligopolistic market structures, to determine which model best depicts the clothing and supermarket industries in Singapore. Retailers are defined as firms which do not manufacture the goods which they sell, but rather only sell goods produced by manufacturers, a criteria met by clothing retailers and supermarkets. In this essay, clothing retailers are taken to be monopolistic competitive because there are many of them in the market, selling slightly differentiated clothes, with low barriers to entry leading to low market power; on the other hand, supermarkets can be taken to be oligopolistic in nature because there are a few large firms in the Singapore market, which tend to be rivals to each other, and with relatively high barriers to entry. Yet, deeper analysis shows that some large, mostly foreign, clothing retailers in Singapore arguably may fall into the oligopolistic category. In general, these two types of retail industries can be examined in terms of their price and non-price behaviour, as monopolistic competitive firms and oligopolies tend to have different market behaviours.

First and foremost, we explain some theory before examining the issue in detail. With regards to price competition, firms are assumed to produce where Marginal Cost (MC) = Marginal Revenue (MR), the profit-maximising or loss-minimising level. Most firms from various market structure will profit-maximise, and this is true of firms in perfect competition, monopolistic competition, oligopoly and monopoly as well.

What Economics Diagram Should Be Drawn Here?

According to the diagram, a monopolistic competitive firm produces at the profit maximising point where MC=MR, at price P and output level Q. In the short run, a monopolistic competitive firm could earn supernormal profit, as long as the average cost (AC) curve is below P. However, in the long run, because of the relatively low barriers to entry and exit of the market, the supernormal profits of the short run would be competed away due to many competitors entering the market. Therefore, in the long run, a monopolistic competitive market earns normal profit.

Oligopolies can be collusive or non-collusive, where collusive means that they act in a concerted manner and co-operate with each other, while non-collusive means that each oligopoly will operate on its own accord, taking care to strategically consider their rival’s likely behaviour. Non-collusive oligopolies would be the main focus of this essay as collusive oligopolies would often form cartels and behave like a monopoly.

What Economics Diagram Should Be Drawn Here?

Similar to a monopolistic competitive firm, non-collusive oligopolies produce at the profit-maximising point, MC=MR as well, at price P and output level Q. Taking into account their rival’s behaviours, non-collusive oligopolies would not raise their prices as their rivals would simply benefit from such actions. On the other hand, they would not lower their prices for a price war would result, as their rivals would have little choice but to follow suit. According to the kinked demand curve model, due to strategic behaviour and mutual interdependence, there would be a situation of sticky prices at price P, where oligopolies do not have any incentives to raise nor lower their prices. The only way in which a price war is sustainable is if the MC curve fell for a firm, due to innovation and dynamic efficiency. In that way, an oligopoly could lower its prices and trigger a price war with the other firms, and if its rivals are unable to match its lower marginal costs, it would win in the long run. Therefore, due to high barriers to entry and market power of the firms, oligopolies earn supernormal profits in the long run.

Since both monopolistic competitive and non-collusive oligopolies produce at the profit maximising point where MC=MR, they do not differ in their conduct for price competition. Hence it is imperative that we focus on the different non-price competition strategies each model employs, in order to compare the market behaviours of firms in the supermarket and clothing industry. Non-price competition is a strategy where a firm tries to distinguish its product or service form others, on the basis of attributes such as design and workmanship. Non-price competition typically involves promotional expenditure such as advertising, sales staff, sales promotion, coupons, free gifts, marketing, new product development and brand management costs. Although any company can use a non-price competition strategy, it is most common amongst monopolistic competition and oligopolies. Product differences can be based on real or imaginary differences. Real differences mean that the product is actually different in terms of its design, composition of materials and substance. Imaginary difference on the other hand, implies that the product is perceived to be different due to persuasive advertising, branding, and marketing differences, which cause a psychological difference in the minds of consumers. Advertising can be either informative or persuasive in nature. Informative advertising informs consumers about the characteristics of the product, while persuasive advertising aims to create brand awareness and loyalty by creating a certain image of the product of the type of consumers the product is targeted at, thus differentiating the product. Oligopolistic firms usually implement persuasive advertising, and tend to engage in costly forms of advertising such as celebrity endorsements, placing large and prominent advertisement on billboards, newspapers, popular magazines and websites, as well as advertising frequency on television. This is because they have very large output to spread out such high advertising costs, and thus are able to reap economies of scale, unlike monopolistic competitive firms, which have considerably lower levels of output. A case in point for oligopolies would be supermarket chains such as Giant and NTUC which place large advertisement on newspapers.

However, on the contrary, despite monopolistic competitive firms earning normal profits in the long run, there still exist some forms of non-price competition. The types of non-price competition employed by these firms tend to be relatively unostentatious as compared to those of oligopolies. To illustrate, let us consider the non-price competition used by monopolistic competitive firms in the clothing industry. Examples of these firms include Zara, Topshop, Charles & Keith, Giordano and Marks & Spencer to name a few. Such firms market themselves by providing unique plastic bags with their company logo printed on it to consumers who have purchased their products. Loyalty and membership cards are also employed, which allows for the accumulation of points whenever the consumer purchases a product from the same brand, and these points can be used for discounts or the redemption of items. The hiring of blogshop models and the use of advertorials and features are also included in their arsenal of non-price competition strategies. In the case of monopolistic competitive firms in the supermarket industry, supermarkets such as ValueDollar employ bundling as one of their non-price competition strategies. In these shops, labels which depicting lower prices being charged if multiple identical items are bought, are placed on almost all sales items, thereby encouraging consumers to purchase more.

Even though oligopolies also employ the types of non-price competition strategies used by monopolistic competitive firms, they also subscribe to other grander and more costly non-price competition strategies. Examples of oligopolies in the clothing industry include Gucci, Louis Vuitton, Prada, Marc Jacobs, and other foreign branded retailers in Singapore. These oligopolies are producers of luxury apparel, and often advertise prominently on local newspapers – especially placing advertisements on the front page or advertisements that span full pages, which are expensive to fund. Celebrity endorsements are also used by these oligopolies to market and appeal to the upper class. Louis Vuitton for instance, employs celebrities such as Madonna, Scarlett Johansson and Angelina Jolie. Sheng Siong, an oligopoly supermarket chain in Singapore, has collaborated with Medicorp – a local television broadcaster – to host “The Sheng Siong Show”. This show showcases the various products available on sale in their supermarkets, along with lucky draws and various contests which patrons of their stores were invited to join.

In conclusion, none of these two market structures can best explain the market behaviours of the diverse retailers present in Singapore. This is because the real world is very complicated and theory’s ceteris paribus does not hold, therefore it is challenging to categorise these firms only using two theoretical models. However, in Singapore’s context, since most of its industries are dominated by oligopolies – large multinational corporations, for instance – it can be concluded that the oligopolistic market structure best explains the market behaviours of the myriad retailers present in Singapore.

JC Economics Essays – This is an adapted response to a H2 / A level economics essay. This economics essay was contributed by SS and WY. WY is a good economics student who has made great strides in economics, by working hard at his A level economics. Special thanks also to SS for the extensive editing of this economics essay. This economics paper was not written under examination conditions, but what can you still learn from it? What are this paper's strengths, and what are its weaknesses? Always think of how you can learn from the economics essays here on this site. 

Alternatively, are there more direct approaches to answering this economics essay question? Is there a more direct, simpler approach? What could the author have done to provide a stronger response to the economics question?

Thanks for reading and cheers!  

Retailers in Singapore supply a wide range of services & products in a variety of market structures. Explain the key differences between oligopolistic competition & monopolistic competition. [10]

This essay seeks to examine the key differences between oligopolies and monopolistic competitive firms. There are five main characteristics of market structure which each type of market structure possesses. They are: number of buyers and sellers, type of product sold, level of barriers to entry, price setting ability and information level. The four main types of market structure are also assessed in six areas of performance, which include productive, allocative and dynamic efficiency, X-inefficiency, product variety and type of profits.

A monopolistic competitive firm is a firm that sells a slightly differentiated product, in a market with many buyers and sellers, with relatively low barriers to entry and exit. Barriers to entry refers to any man-made or natural barriers which are strong enough to prevent new rival firms from competing on an equal basis with existing firms, and prevent these firms from entering or exiting the market. There are two main types of barriers to entry, namely natural and artificial. Natural barriers to entry refers to barriers which are intrinsic to the industry itself, such as economies of scale. Artificial or man-made barriers to entry refer to laws, legislations, patents, and other obstacles to entering or exiting an industry. Monopolistic competitive firms are price setters, but have limited price setting ability due to many competitors in the market selling differentiated but similar products. Imperfect information exists in a monopolistic competitive market.

An oligopoly refers to a firm that sells either a homogenous or differentiated product, in a market with many buyers but relatively few sellers, each mutually interdependent on each other, with relatively high barriers to entry and exit. Mutual interdependence means that each of the firms in an oligopolistic market structure will take into account each other’s pricing and non-pricing behaviour when making their strategies. This strategic or game theoretic behaviour occurs because firm in such an industry is not a competitor, but rather a rival to the other firms. Hence, oligopolies can be collusive or non-collusive, where collusive means that they act in a concerted manner and cooperate with each other, while non-collusive means that each oligopoly operates on its own accord, taking care to strategically consider their rivals likely behaviour. This essay focuses on non-collusive oligopolies for collusive oligopolies often form cartels and behave just like a monopoly. Due to the low number of firms in the market as compared to the monopolistic competitive market, each oligopoly has a relatively large market share, and thus has relatively high market power. This, coupled with the relatively high barriers to entry, results in oligopolies being a price setter with relatively high degree of price setting ability. Imperfect information also exists in the market.

An example of monopolistic competitive firms in the supermarket industry would be the common provision shops selling all sorts of goods. These provision shops are mostly located at the void decks of Housing Development Board (HDB) flats, which implies that their barriers to entry are relatively low when compared to those supermarkets which are located within shopping malls. Hence, there are many of such provision shops in Singapore, compared to the number of supermarkets. These shops also have limited price setting ability due to the presence of many other provision shops in the island selling differentiated but similar products.

On the other hand, supermarkets such as NTUC, Cold Storage and Sheng Siong are examples of oligopolies in the supermarket industry. These supermarket chains are often located in places with crowds or shopping malls, and thus have relatively high barriers to entry due to the high rent. Hence, since an average supermarket chain has a large floor-space, there usually only exists a few of these supermarkets in the industry, resulting in these oligopolies having high market power and thus a high degree of price setting ability as compared to those of the monopolistic competitive – provision shop – firms.

Both monopolistic competitive and oligopolistic firms are productively and allocatively inefficient. However, an oligopoly is more allocatively inefficient than a monopolistic competitive firm as it earns supernormal profits as opposed to normal profits in the long run. A monopolistic competitive firm does not have the willingness nor ability to engage in costly research and development (R&D) and be dynamically efficient, while an oligopoly does. X-inefficiency refers to the fact that the firm does not act energetically to curb costs. Oligopolies are mostly X-inefficient – especially collusive oligopolies that behaves like a monopoly – as they are able to absorb the costs through their supernormal profits, unlike monopolistic competitive firms, which cannot afford to be X-inefficient as they only earn normal profits. Regarding product variety, monopolistic competitive firms have a myriad of product variety as the firms sell slightly differentiated products. As for the oligopolistic market structure, it depends on the specific industry the firms operate in, which dictates whether a homogenous product – such as crude oil – or a differentiated product is produced. A case in point for product variety would be that one could find more variety of instant noodles, canned drinks and frozen food in a supermarket chain than in any provision shop.

JC Economics Essays - Economics Tutor's comments: Special and very heartfelt thanks to WYWS for his kind H2 A level economics essay contribution here on this economics essay learning site. This is his first contribution and I look forward to more essay contributions in future. 

This H2 economics essay is rather well-written, but has a few issues, which could be better addressed. 

One, this economics response could benefit from more "on the one hand, but on the other" constructions. Language is important in an economics response, to communicate the right ideas. More contrast would have been beneficial to this economics essay's structure and sound. 

Second, this economics paper could be a lot tighter and get to the point faster in some areas, but having said that, as this essay is currently written, it is still very strong. Yes, the essay could also benefit from economics diagrams - so readers and students are encouraged to think of what economics diagrams to draw and how to properly illustrate them. Having said that, this economics essay is well-crafted, detailed, and strong overall. Thank you all for learning, reading, and thinking about improvements, and cheers!

Discuss whether economic analysis favours large firms over smaller ones.

This paper argues that economic analysis, on the one hand, favours large firms because they are able to reap economies of scale, with all its implications on costs, prices, and profitability, but on the other hand diseconomies of scale might pose an issue and other economic reasons might also favour small firms over larger ones.

First, it can be argued that traditionally economic analysis favours large firms. This is because of the fact that they can reap internal economies of scale. Internal economies of scale are cost savings that accrue directly to the firm from the expansion of the firm's output, independent of what is happening to other firms. As the firm increases its scale of production by producing more output, the LRAC falls accordingly. On an economics diagram, the falling portion of the firm’s LRAC reflects internal economies of scale. A large firm producing at a larger level of output will be able to benefit in the form of enjoying a lower average cost as compared to a small firm producing at a lower level of output with an average cost higher than the large firm. 

What economics diagram could/should be drawn here?

The lower average cost that a large firm enjoys can be derived from various sources. For instance, when a large firm is able to reap more internal economies of scale, consumers may benefit in the form of lower prices if firms pass on their cost savings. Many oligopolies pass on the benefits of lower costs onto their consumers. Firms may also use the cost savings to carry out research and development (R&D) to improve on their production processes, which can bring down the cost of production and eventually be passed on to consumers in the form of lower prices, or improve on the quality of the goods sold, improving the welfare of consumers.

Large firms are able to earn supernormal profits in the long run as compared to small firms like that of a monopolistically competitive firm. The large firms’ supernormal profits are protected by high barriers to entry, making it difficult for potential firms to enter the industry. This means that large firms will have a higher financial ability to carry out R&D that can benefit consumers as explained previously. This often results in dynamic efficiency, the willingness and ability to innovate and improve processes over time, and as Joseph Schumpeter once said results in "creative destruction", the creation of new, novel, and disruptive technologies and products, just like the iPhone came to dominate the market and displace many other cellphone models, like Nokia. And in contrast, small firms may not have the financial ability to do so since they can only earn normal profits in the long run, which means that they have neither willingness nor ability to conduct R&D. In business terms, these small firms may therefore be forced out of business. 

On the other hand, economic analysis does not always favour large firms, and in fact sometimes may favour small firms. One reason could be due to internal diseconomies of scale. This happens when a firm expands beyond its optimum size. In theory, a firm that expands beyond its MES (minimum efficient scale) will start to face diseconomies. There are many reasons for this. First, this could be due to managerial diseconomies. As the size of the firm increases, it becomes increasingly difficult to carry out the management functions of co-ordination, control, and the maintenance of morale. Large firms may then pass on this higher average cost in the form of higher prices, and this would not be advantageous to consumers. In some industries, diseconomies of scale set in early, meaning that the MES is low and internal economies of scale is exhausted quickly. As such, costs rise sharply as output increases. Any advantage to large-scale production is more than offset by the disadvantage. The optimum size of firms in such industries is small. Therefore it can be convincingly argued that there are many reasons for diseconomies of scale - but in this paper's opinion, the most important factors are managerial diseconomies, or the nature of the industry is such that small firms are favoured in a particular industry. 

Furthermore, economists should consider demand-side or revenue-side factors, not just cost-side factors. The demand for a particular firm's output may be low, thus leading to the situation where the firm has to be small by its nature. The total demand, both domestic and foreign, for the firm’s output may be small because the firm is selling a niche product. Such a market may be limited by price. This is true for distinctive products like luxury sports cars such as Lamborghini, exclusive clothing such as Gucci and Prada fashion, and high quality jewellery, where only a small group of customers are willing and able to pay for the element of uniqueness and prestige.

Furthermore, if the product has great bulk in relation to its value or requires special transport arrangement, the transport cost will be high relative to the unit price. Under such circumstances, the market for such products is likely to be local rather than national.  

Another reason for firms remaining small could be the need to cater to consumer’s specific or individual requests. In this case, due to the varying nature of such requests, the size of production unit tends to be small. Thus, firms providing services in the area of law or repair services tend to be small. For instance, as cars do not break down in exactly the same way, the ‘non-standardised’ services make mass production of repair services impossible.

In the final analysis, since large firms’ supernormal profits are protected by high barriers to entry, this lowers the firm’s incentive to engage in R&D and become dynamic efficient since there is little chance for new firms to enter the industry to erode away its supernormal profits earned. This will in turn have implications on consumers as there will be little improvements to the quality of goods. As such, large firms may not always be favoured. On the contrary, small firms like a monopolistically competitive firm may have the incentive to engage in R&D since firms making subnormal profits will be the first to leave the industry. Hence, in order to ensure long-term survival and the possibility to earn supernormal profits in the short run, they will have the incentive to innovate. Therefore, it can be argued that while the argument for internal economies of scale seems to favour large firms, small firms can and often do coexist with large firms.

JC Economics Essays - This economics essay is on the traditional economics debate on the size of firms - does size matter? Does analysis favour large firms over small firms, or does it really depend - and what does it depend on? On the one hand, what are the good points of having firms large? On the other, are there situations where it would be better to have small firms? Why is this the case? Do think through your approach after reading this suggested essay. Special thanks to B for his contribution to this economics blog. Thanks for reading and cheers. 

Explain how the degree of market dominance affects the amount of profits earned by a firm. [10]

This paper explains how the degree of market dominance, which results from the level of barriers to entry in an industry, will affect the amount of profits earned by a firm, which is assumed to be a profit-maximising entity.

First, it has to be observed that a firm with market dominance will have a downward sloping demand curve. The higher the market dominance a firm has, the higher its price setting ability, and this results in a more price inelastic demand curve. The higher the ability of the firm to increase total revenue (TR, which is equal to P x Q), since an increase in price would lead to a less than proportionate fall in its quantity demanded, the more likely this would in turn indicate more profits for the firm, assuming no change in the total cost (TC). Market dominance and price setting ability arise because of the presence of barriers to entry.

What are barriers to entry? Barriers to entry refer to any man-made or natural barriers which are strong enough to prevent new rival firms from competing on an equal basis with the existing firms. A perfectly competitive and monopolistically competitive market structure both have no and low barriers to entry and exit respectively. Thus, a perfectly competitive firm possesses no market dominance and a monopolistically competitive firm possesses low market dominance. There are substantial barriers to entry and exit in an oligopolistic market and for a monopoly it has the highest level of barriers to entry and exit. Thus, an oligopoly and monopoly possess a high degree of market dominance. Due to the varying degrees of barriers to entry, the different market structures will see a different impact on the amount of profits earned in the long run. The amount of profits can take the form of supernormal profits (TR>TC), normal profits (TR=TC) or subnormal profits (TR<TC). In a perfectly competitive market, there are no barriers to entry. This implies that firms are free to enter and exit the market.

Explain using diagrams, how the PC firm eventually makes normal profits

In contrast, should a perfectly competitive firm be earning subnormal profits initially, this will cause some firms to leave the industry and decrease the market supply. This will in turn increase the market price and diminish the magnitude of subnormal profits. Firms will continue to leave the industry until the remaining firms earn normal profits in the long run.

Similarly, in a monopolistically competitive market, there are low barriers to entry in reality.

Explain using diagrams, how the MC firm eventually makes normal profits

In contrast, a monopoly faces high barriers to entry. If the monopolist is making supernormal profit initially, new firms cannot easily enter the market even when there are supernormal profits to be made. There will be no change to the firm’s demand and it can continue to retain its supernormal profits. Likewise for a firm in an oligopolistic market, it also faces considerable barriers to entry. As it is difficult for firms to enter or exit easily, an oligopolistic firm’s supernormal profits will not be whittled away and can continue to retain its supernormal profits in the long run.

In conclusion, the higher the degree of market dominance as a result of higher barriers to entry, the higher the degree of profits earned by the firm in question, which usually means ultimately that oligopolies and monopolies earn supernormal profits while perfectly competitive and monopolistic firms earn normal profits. 

JC Economics Essays - This economics essay was contributed by a student from a certain Junior College in Singapore. It was not written under timed examination conditions, but is supposed to reflect the best possible answer given by a candidate to the economics question about the degree of market dominance and how it affects a firm's profitability. Special thanks to S for his contribution to this economics blog. 

What comments would an economics tutor make about this essay response? First, take note that this is a purely theoretical question. Many times, candidates have to determine if the question is asking a purely theoretical question (usually the small part questions of CSQ or the 10 mark questions are about theory), or if the real world context is required. Often, the larger essay questions require application of economics to the context, or real world examples. In this case, this economics question seems to be a pure theory question testing if students understand the concepts of market structure, market dominance, barriers to entry, and the type of profits. While this essay is excellently crafted, perhaps there could be a more efficient way of writing it? While the material is sound and accessible to A level students, could there be a more parsimonious way of writing this paper, given that it is only 10 marks? Are there alternative approaches to answering this economics question? On the other hand, the level of detail is excellent and this paper deserves a very high grade for its targeted yet detailed response. Think about how you would approach this essay. Thanks for reading and cheers!

“A monopolistic firm has market power whereas a perfectly competitive firm has no market power. Perfect competition is, therefore, clearly preferable to monopoly, say economists. Discuss this statement. [25]

Monopoly is a firm which is the only seller of a unique product which has no close substitutes. In a market of perfect competition, the level of competition is very high, and each firm is a small entity, a price taker. There are four assumptions for a monopoly to exist: there is only one seller but many buyers, high barriers to entry (both natural and artificial), a highly differentiated product such that it is difficult or impractical to copy the product, and imperfect information. There are four main assumptions for a perfectly competitive market, which are: there are many sellers and buyers, low barriers to entry, homogenous product and perfect information. This essay attempts to explain the reasons for the high market power of a monopoly, low market power for a perfectly competitive firm, and the limitations of monopoly and the choice between a monopoly and a perfectly competitive market. 

Yes, it is true that monopoly has very high barriers to entry while a perfectly competitive market has very low barriers to entry. Barriers to entry refer to the reasons which deter potential entrants from entering the market. There are two types of barriers, which are natural barriers and artificial barriers. Monopoly often has high barriers due to various reasons. Firstly, when there is very high economies of scale of the existing monopoly firm, the starting cost of potential entrants will be very high as a result, and this is often because of high fixed costs, such as massive initial capital outlay followed by declining LRAC. 

Secondly, when there is limited and small market size, localized monopoly might arguably be present because the demand from the consumers is very low due to say a small population, which cannot support more suppliers. For example, there will be only one hairdressing shop in a small town because of its small population. 

Thirdly, when there are network economies, it is very hard for potential entrants to enter the market because of existing networks among users. For instance, after Facebook, it is difficult to have any more of the same type of online social network websites because users have built up broad network on Facebook already. 

These are main natural barriers. There are also artificial barriers to entry set up by governments and the existing firms as well. For example, patents, licenses, and regulations restrict potential entrants from entering. Existing will have limit pricing and predatory pricing to deter potential entrants from entering. Firms also can control retailers and suppliers to prevent potential firms. For example, deBeers controls the diamond resources of the world and can restrict diamond production. Therefore, a monopoly has very high barriers to entry to limit the number of existing firms to a very low number, i.e. one firm. The monopoly has very significant market share hence strong market power to control the price while a perfectly competitive firm has many competitors in the market and therefore their market share is insignificant as a result of this very low market power. Hence, a perfectly competitive firm is a price taker, whereas a monopoly can set output and accept a price, or set the price and accept the resulting output. 

[Insert diagram on PC Industry and PC firm]

The perfectly competitive firm takes the price from the intersection of market demand and supply. To maximize profit, the firm will produce at MC = MR at price P. In the long run, a perfectly competitive firm will gain normal profits when LRAC = P at minimum efficient scale (MES). 

Therefore, a perfectly competitive firm is productive efficient because it always produces along LRAC curve and every firm in the industry tries to produce at MES for maximized profits and minimized costs for survival. A perfectly competitive firm is also allocative efficient because P = AC. It gains maximum social welfare. 

A perfectly competitive firm is also equitable because it gains normal profits in the long run. There are therefore good and solid reasons for the preference of a perfectly competitive firm than a monopoly. A monopoly is productive inefficient , allocative inefficient, and inequitable as explained below. 

[Insert diagram on Monopoly Firm showing Supernormal profit and Deadweight loss]

A monopoly is productive inefficient because the firm has great market power and it can be X-inefficient, which means that it does not act energetically to curb its costs, for instance costs from lobbying for government intervention. It can produce above the LRAC curve due to overpaying for workers, building ostentatious buildings, or unnecessary perks. 

A monopoly is allocative inefficient because of the deadweight loss resulting from monopoly power. At the profit maximizing point, MC = MR, and P > AC. Hence, there is a positive welfare to be achieved by promoting perfectly competitive firms.

A monopoly is not equitable to consumers because of its supernormal profits gained in the long run. 

However, a monopoly can be preferred to a perfectly competitive firm because it is dynamic efficient. It has the willingness and ability to innovate and create to do research and development (R&D) and to improve its product variety through product proliferation. This is because of its supernormal profits in the long run, leading to its ability to conduct R&D. It also aims to utilise product proliferation to fill the product gap, and thereby prevent potential entrants from finding a niche to exploit in its market that it dominates. A perfectly competitive firm is also not willing to innovate because of perfect information in its market, so other firms can easily copy from it, so a monopoly does have some strengths. 

[Insert diagram to compare PC firm and Monopoly]

A monopoly firm usually restricts output and set high price at maximized profit level, while a perfectly competitive firm has lower price and more output at the intersection point of its demand and supply. At this point in time, a perfectly competitive firm is preferred to a monopoly. However, in the long run, when a monopoly grows and exploits its economies of scale, it moves its (LR)MC curve downwards. It can then produce more output at a lower price. At this time, a monopoly is preferred to a perfectly competitive firm due to its dynamic efficiency. 

In conclusion, it is not always preferable to have a perfect competition than a monopoly. Ostensibly there are many good points that perfectly competitive firms have, such as productive efficiency and allocative efficiency, among other ideal points, whereas monopoly does appear or seem not ideal, due to its lack of productive and allocative efficiency. However, a monopoly has more dynamic efficiency than a perfectly competitive firm and has the potential to have lower prices than a perfectly competitive firm. In addition, a perfectly competitive market is ideal but does not exist in the real world. Hence, monopoly is sometimes preferable to a perfectly competitive firm. 

JC Economics Essays - H2 Economics essay on monopoly and perfect competition. Normally I would give detailed comments for essays and make some commentary or remarks on how good the essay is, or how it can be further improved by identifying particular points, arguments, or even sometimes, rarely, mistakes. Sometimes, I even ask difficult thinking questions about how the essay can be improved. However, for this particular essay done under timed examination conditions, I rather like its style and content, and so instead of giving my comments I will let you do most of the thinking: one simple question is - what can you learn from this economics essay? Thanks for reading and cheers. 

Explain how a monopolistic firm and a perfectly competitive firm make their pricing and output decisions in relation to the differences in the barriers to entry to their respective industry. [10]

This essay topic is on market structures, and in particular barriers to entry with respect to monopolies and perfectly competitive firms. What are barriers to entry? Barriers to entry refers to reasons that deter and prevents new firms from entering a market. They could be further categorized specifically into artificial barriers to entry and natural barriers to entry. What are monopolies and perfectly competitive firms? Monopolies refer to firms in markets with only one seller selling a uniquely differentiated product that have no close substitutes while perfectly competitive firms are those in markets that consist of large number of buyers and sellers selling homogeneous products. 

In order to explain the difference in pricing and output decisions between a monopoly and a perfectly competitive firm, a comparison between the characteristics of both firms need to be made. This Economics essay therefore talks about the various assumptions a monopoly and a perfectly competitive firm, before moving on to explain diagrammatically the difference in their pricing and output decisions.

        

Monopolies assumes the characteristics of high barriers to entry, uniquely differentiated product with no close substitutes, one seller or a dominant firm in a market and generally imperfect information. On the other hand, perfectly competitive firms assume characteristics of low or almost no barriers to entry, homogeneous products, large number of buyers and sellers, and perfect information.

           

The following diagrams will move on to explain the pricing decisions of a monopolistic firm and a perfectly competitive firm respectively.

[Insert diagram of a monopolistic firm]

           

Due to the high barriers to entry, a monopolistic firm is a price setter and thus is able to secure the profit maximization (or loss minimization) point at MC = MR, to earn supernormal profits.

[Insert diagram of a perfectly competitive firm]

           

On the other hand, the low barriers to entry means that a competitive firm is a price taker as it accepts the price pre-determined by the intersection of the market demand and supply curves.

Therefore, because it accepts the market price, it produces at an output level at MC = MR, and controls only its output level to vary its profits.

           

The high barriers to entry allows monopolistic firms to set their prices as it is unlikely that there will be an entry of new firms to reduce the market power and hence pricing influence of that monopolists. However, perfectly competitive firms are unable to do that since the low barriers to entry means that new firms could easily enter the market, diluting each firms’ market power, thus all firms have small market power, resulting in them being price takers.

In conclusion, barriers to entry are a significant assumption that affects the pricing decisions of monopolistic and perfectly competitive firms, although the other assumptions also play an important role.

JC Economics Essays - H2 A level Economics style, model, sample economics materials - tutor's comments: This economics essay is written in a simple, lucid, clear, short, and direct manner which addresses the economics question posed at the start. This makes this essay answer easy to follow and clear, direct, and easy to mark for the examiner, which are all plus points for this model paper. There is very good use of diagrams to illustrate ideas and points. While a bit short, the conclusion is simple, easy, and direct. The conclusion in this case can be short because this is not a 13, 15 or 25 mark essay question, which would require a longer, more evaluative, and higher value added response as a conclusion. The question is: how can you improve on this economics essay, to make it more of a model economics answer? At the same time, there are other essay styles to write this economics essay, some of which use more words and approach this question from a slightly different angle to answer the question equally well. What do you think? Thanks for reading and cheers. 

"Monopolies exist mainly because businesses create barriers to entry by manipulating their prices to keep potential rivals from entering their business markets." Do you agree with this statement? [15]

It can be argued that monopolies indeed exist because of the presence of barriers to entry such as patents, licenses and substantial economies of scale which deter potential entrants from entering their market. These monopolies can also deter the entry of new firms through policies such as anti-competitive pricing. This essay will therefore talk about how artificial barriers to entry, most importantly anti-competitive pricing policies and methods lead to the existence of monopolies, then moving on to the anti-thesis, which is how then natural barriers to entry contribute to the existence of monopolies as well. The essay will conclude with an evaluation of which barrier to entry, artificial or natural barriers, is more significant.

The artificial barrier to entry would arguably be anti-competitive pricing. Anti-competitive pricing could be further broken down into limit pricing, which refers to the case where monopolists set their prices below the expected average costs of a potential entrant, to deter them from entering the market since they will make losses.

Predatory pricing, on the other hand, is a similar concept, except it is used in such a way that existing competitors would be driven out of the market due to the making of subnormal profits. Therefore, anti-competitive pricing allows for the existence of monopolies, since potential and existing competitors are out of the way.

There are also other artificial barriers to entry such as those created by governments. Governments could support the creation of monopolies by giving patents and licenses to certain firms only. The issue of patents means that monopoly rights are given to a firm to produce a new product or use a new process for a specified time period. Such actions of the government can then allow for the existence of monopolies since such firms are given substantial market power.

           

However, the existence of monopolies could also be due to natural barriers to entry, rather than just anti-competitive pricing policies.

One of which would be natural monopolies. A natural monopoly refers to a market where average costs are falling throughout the entire range of market demand, which makes it less costly for one firm to supply the entire market, hence supporting the existence of monopolies.

[Insert diagram on natural monopoly]

As seen from the figure above, if there were to be more than one firm in the market, the AR of each firm is not even enough to cover the LRAC. Therefore, such a situation supports the existence of monopolies since if there is only one firm, the firm could make supernormal profits.

Next, another natural barrier could be substantial (internal) economies of scale, where larger firms could reap more economies of scale and be more cost efficient. This means that potential entrants will have to produce at a large scale in order to compete and this deters them from entering the market. Such deterrence then leads to the existence of monopolies.

In conclusion, artificial barriers could more adequately explain the existence of monopolies. This is because most monopolies are run by governments whom create artificial barriers like patents and licenses to deter potential entrants. Therefore, upon evaluation, the existence of monopolies would be more significantly attributed to artificial barriers as compared to natural barriers. Hence, the statement should read that monopolies exist mainly because of artificial barriers to entry.

JC Economics Essays - H2 (A levels) sample, model economics essay answer: tutor's comments - this economics essay is well crafted, well argued, answers and analyses the issue very well. The main learning lessons from this essay are: it answers the essay question directly, it has a lot of good solid economic theory, and it is properly structured using the thesis, anti thesis, and synthesis approach which is a very good essay system that you should apply. You might want to think about how could you improve on this essay, and what other examples could you apply to this economics question. More relevant, real world, and specific examples would massively improve this economics answer, and the response would be improved vastly. Special thanks to kind contributors. 

"Monopolies exist mainly because monopoly firms create barriers to entry by manipulating their prices to keep potential competitors from contesting their markets." Do you agree with this argument? [15]

"Monopolies exist mainly because monopoly firms create barriers to entry by manipulating their prices to keep potential competitors from contesting their markets." Do you agree with this argument? [15]

In this essay, the thesis presented would be artificial barriers being used by firms as indicated by ‘create’. As manipulating prices was given as the method to keep potential competitors from entering their markets, the specific arguments would be limit pricing and predatory pricing as the artificial barriers. On the flip-side, the anti-thesis would be artificial barriers created by government and natural barriers already present. Hence, this essay seeks to first explain how limit pricing and predatory pricing are being used by firms before going on to explain some artificial barriers created by the government such as licenses and patents as well as some natural barriers such as reaping substantial economies of scale and a natural monopoly. The essay would then conclude by evaluating which kind of barriers is more effective in keeping potential competitors from entering a monopoly’s market. 

Firstly, limit pricing is where the monopoly sets the price of its goods lower than the average cost of that of a potential entrant. This would greatly deter the potential entrant from wanting to enter the market as he would lose out by being unable to earn any profits unlike the monopoly. As such, it is evident how a monopoly can utilize limit pricing as a mean to keep potential competitors from entering the market.

Secondly, predatory pricing is whereby the monopoly sets the price of its goods lower than the average cost of that existing competitor in the market. This would enable the monopoly to successfully remove his competitor from the market since the competitor would start to make losses and become unable to survive in the market. This would in turn deter potential competitors from entering the market as they would not want to end up in the same situation as that competitor which was defeated, showing how predatory pricing is effective in keeping new competitors from entering. 

Besides manipulating prices by firms, the government can also keep potential competitors from entering the monopolies’ market through issuing of licenses and patents. Licenses and patents from the government give the monopolies the legal authority and right to produce their goods which are therefore even more differentiated and new firms are prevented from entering by law. This illustrates how the government, and not the firms themselves, can create artificial barriers to disallow potential competitors from entering the market. 

On the other hand, natural barriers also exist. Large firms like monopolies already existing in the market reap substantial economies of scale. This keeps potential competitors out of the market as the start-up costs are very high and it is thus very hard for them to survive in the industry, thus deterring them from entering. 

Another natural barrier would be a natural monopoly which already has high barriers to entry to begin with, allowing it to keep potential competitors from entering the market. [NOTE: Economics tutor's comments on this short sentence: This is not really the case; it’s more of the fact that no two firms can exist in the market at the same time because of the falling LRAC throughout the entire range of demand.]

[Insert diagram of Natural monopoly]

In conclusion, artificial barriers are usually more effective than natural barriers in keeping potential competitors from entering the market of monopolies. This is due to the fact that monopolies are mostly run by governments who then can create artificial barriers on their own. At the same time, it is also within the control of the firms to create their own barriers, especially by manipulating prices, to keep their competitors out of the market. 

JC Economics Essays - standard 'A' level H2 Economics essay: Tutor's comments on the essay - Special thanks to A.G. for her contribution, as well as the econs students behind this very impressive work. Other than the section in which I had to explicitly correct the students' written work, this essay is still generally quite good. Why is this essay good, and what makes it worthy of a grade A? It addresses the question and generally gets to the point quickly. It identifies the theme and then does a very good job of trying to address the parts of the question that help to get good grades. Although the student did require me to address one section by writing in an explicit comment on the concept, the general idea was still there, and overall the paper was quite good, especially with the natural monopoly diagram. Think of how to draw the economics diagrams for all your essays properly, and be careful as to what they look like. All the best, and think of how you could do better. Thanks for reading and cheers!

Explain, with relevant economic theory, how the pricing and output decisions between a monopoly firm and a perfectly competitive firm differ because of their differences in barriers to entry. [10]

This paper explains how the pricing and output decisions of a monopoly and a perfectly competitive firm differ due to the differences in the nature of their barriers to entry. What is a monopoly? A monopoly is a market where there is only one seller of a uniquely differentiated product with no close substitutes. What is a perfectly competitive firm? A perfectly competitive firm is one where there are many buyers and sellers of one homogeneous product. What are barriers to entry? Barriers to entry are obstacles or barriers that deter new firms from entering the market. There are two main types of barriers, artificial (man-made barriers) and natural (such as huge economies of scale)

After having defined the various concepts, this essay seeks to first state the assumptions of each firm before illustrating with a diagram how each firm's pricing decision is made. It would then show how differences in barriers to entry affect this important pricing decision of a monopoly and perfectly competitive firm.

[Insert an economics diagram on Monopoly]

The assumptions of a monopoly are high barriers to entry which deters firms from entering, highly differentiated product with no close substitutes and a situation where there are many buyers but only one seller who dominate the market. For a monopoly, the profit maximizing point is where MC = MR. This shows how pricing decision is made for a monopoly which aims to maximize profits.

[Insert economics diagram on a Perfectly Competitive firm]

On the other hand, the assumptions of a perfectly competitive firm are low or no barriers to entry, a homogeneous product, many buyers and sellers in the market, as well as perfect information. The profit maximising point for this firm is also where MC = MR. This also shows how the pricing decision is made for a perfectly competitive firm, and it is different from a monopolist's decision because the price is lower and the equilibrium output is higher - that is, P is lower, the Q is higher, compared to a monopoly.

In conclusion, when considering barriers to entry, having established how the pricing decision is made by both a monopoly and a perfectly competitive firm, this distinction helps to explain how the differences in these barriers to entry affect their pricing decisions. It is evident that with high barriers to entry, in the case of a monopoly, the monopoly is a price setter since firms are deterred and prevented from entering the market easily. Conversely, with low barriers to entry, which is in the case of a perfectly competitive firm, such a firm is a price taker since new firms can enter the market very easily, explaining why the firm follows the price set in the market. 

JC Economics Essays – H2 A levels – Economics tutor’s comments: This A level economics essay answers the question of barriers to entry and market structure directly, but a lot more thought is required.

What are the main strengths of this economics essay? Think about it. What are the main weaknesses of this economics essay? Think about this question also. The main good thing about this essay that makes it useful in learning economics is that it addresses the question directly, through the use of relevant, clear cut diagrams. Economics diagrams are very important to answering a question, and there should be a well developed paragraph assisting the economics diagram to do its job well.

However, perhaps this economics paper could be better developed with real life examples and other illustrations that could show the theory. While the question asks for the "relevant economic theory", and this essay has done precisely that, this economics essay could be helped further by developing the paragraphs with some real life examples. How else could this essay have been improved? Think of how you could help to make this a better essay than it already is.

Special thanks and cheers to model students SS, AG, and JC for their kind yet invaluable contributions. Special thanks to SS for his editing and vetting of this sample essay to make it even better than it was originally. Thank you for reading, and cheers. 

Explain how the pricing decision between a monopoly firm and a perfectly competitive firm differs because of differences in the levels of barriers to entry. [10]

A monopoly refers to a market where there is only one seller of one product that has no close substitutes. In perfect competition, there are many sellers and buyers selling one homogeneous product. A monopoly is a price setter while firms in perfect competition are price takers. A monopoly is a price setter while firms in perfect competition are price takers. A monopoly exists because barriers to entry are very high, whereas a perfectly competitive firm exists because barriers to entry are very low or even non existent. In this Economics essay, I will explain the reasons for high and low barriers to entry for a monopoly and firms in perfect competition respectively, and how the price decision will thus differ between the two market structures.

A monopoly exists because barriers to entry are so high such that new firms are totally deterred from entering the market, and therefore there is only one dominant or major firm in the market. There are two types of barriers to entry: natural barriers and artificial barriers to entry. Natural barriers refer to inherent characteristics of the market which deter the entry of firms into a market. For example, the monopoly of diamond market, De Beers controlled more than 98% of the diamond resources last time and was able to deter any other firms from entering the market. Localised monopoly also has very high barriers to entry due to the fact that limited population does not demand so many firms for one good or service. Hence, in a small town, one firm is enough to fulfill the demand. For example, hairdressing shops can be considered localised monopolies.

Artificial barriers refer to deliberate actions taken by governments of firms to deter entry into a market. Governments may sell licenses to firms which want to enter a market in very high prices. For example, setting up one casino is very hard in most of the countries because governments will consider the negative externalities of opening a casino. Existing firms will set their prices lower than entering prices to deter new firms from entering the market. 

In perfect competition, barriers to entry are low so it is relatively easy for new firms to enter the market to produce. Therefore, so many small firms with each having an insignificant market share are present in perfect competition. Each firm’s market share is negligible due to the low barriers to entry and exit. Changes in a single firm’s output will not have effect on the market’s total supply and hence the market price.

Hence, as price takers, firms in perfect competition will take the price attained from intersection of demand and supply of the whole market. 

[Insert diagram for the Industry (Market)]

[Insert diagram for the Firm]

As shown in the diagrams above, the price decision in a perfect competition is taken by all the small firms at P0. P0 is the same as PE which is the intersection equilibrium price of demand curve D and supply curve S in the industry. 

If the industry has only one firm which is monopoly, it can decide the price as it wants due to the fact that there is no other firm to hinder its great market power. 

[Insert diagram on monopoly]

As shown in the diagram above, the price is determined when maximum profits can be generated. i.e. at the point where MC = MR. 

In conclusion, a monopoly firm and a perfectly competitive firm differs in terms of pricing because the barriers to entry confer market power (or the lack thereof), which leads to price setting ability or a price taking result. 

JC Economics Essays (H2 'A' Level Standard Economics Essay, part (a)): Economics tutor's comments - There are many important essay writing lessons that students can learn from this economics essay on monopoly, perfect competition, and profit maximisation. What is good, and what is bad, about the essay introduction? Was the introduction clear, addressing the topic, and defining key terms and concepts needed? What is good about the economic analysis in this particular paper, in the body of the essay? Did the analysis address the requirements of the economics question? What is good or less good about the writing style and approach taken in this economics essay? Is the essay well written? To a large extent, this is an excellently crafted essay, well written and clear, but there are some ways in which it could have been further developed and made even better - what are those ways? How would you do essay editing for this paper, if you were the economics tutor? How would you apply more of the economics knowledge, insights and analysis to make this paper more developed? Also, how would you mark this economics essay, if you were the examiner? Thanks for reading and cheers. Special thanks to contributions from students.