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Demand Curve: Monopoly and Perfectly Competitive Firm

The demand curves for a monopolistic firm and a perfectly competitive firm

The difference between the monopolistic and perfectly competitive markets is remarkable. In a perfectly competitive market, very many firms sell the same product. Hence, the production choices made by an individual firm have no impact on market prices. Such firms take the given market price. On the other hand, a monopolistic firm is the only one that produces a particular class of products. Its production choices can affect market prices. Every additional unit sold attracts a decrease in price. Therefore, the demand curve for a monopolistic firm takes a downward slope, whereas that of a perfectly competitive firm is horizontal (Arnold, 2014).

The demand curve that the monopolistic firm faces is the market demand curve. It does not have to take the given price. It can search the market demand curve to find the price that maximizes its profit. By reducing the output, it can increase the equilibrium price. In a perfectly competitive firm, the market demand curve assumes a downward slope, although the individual firm’s demand curve is perfectly elastic (Arnold, 2014). The market demand curve is downward sloping because an increase in the price leads to market demand.

According to Baurnol and Alan (2015), the market price is set by the intersection of the market demand and supply. All firms sell homogeneous products. Therefore, each supplier meets a small part of the total market demand. Therefore, there is no reason for a consumer to pay a higher price to one firm than another. Hence, a firm that raises its price may result in losing its market share. The curve is also horizontal because firms do not realize an economic profit. If they lower their prices, they will go out of business. Since they can neither raise nor lower their prices, they have a horizontal demand curve.

Goods that are Likely to be produced by a Monopolistic Firm

To determine the commodities that a monopolistic firm is likely to manufacture, it is crucial to consider the case where companies deal with the production of automobiles, electricity transmission, eggs, and oil. The ones that deal with electricity transmission and diamonds are likely to become monopolies, as explained below. Firstly, the company that deals with electricity transmission is likely to develop as a natural monopoly. When the normal total costs drop below any existing related level, a company is best placed to enjoy the economies of scale above the pertinent array of output. The situation leads to the development of a natural monopoly.

The monopoly exists because it is more economical to permit one firm to deal with the large production than encouraging numerous companies to offer small volumes of the product. For instance, the cost required to develop the infrastructure for the production of electricity is considerably high and intricate, where numerous companies are involved. Moreover, even if several firms are willing to invest in constructing the infrastructure, the marginal cost of offering electricity to an extra customer is relatively low. Thus, the regular total costs decline as the output range increases. Subsequently, it will be more efficient for electricity transmission to be produced by a monopolistic firm (Sexton, 2015).

Diamonds are also likely to be produced by a monopolistic company. Considering the scarcity of diamonds and the cost of production, a firm that succeeds in finding the resource and managing the cost of production is likely to earn a monopoly. Consider the case of DeBeers that became a monopolistic business as a dealer in diamonds because of owning key resources. However, a monopoly in diamond production will be highly influenced by the ability of the company to convince consumers not to be attracted by other substitute products such as gemstones or silver. The monopoly will also rely heavily on the ability of the product to be unique (Baumol & Alan, 2015).

Microsoft as a Monopolistic Company

Monopolistic businesses arise either because of a fundamental resource owned by the firm, the government giving a firm the exclusive right to produce a commodity, legal regulations barring the entry of other firms, or extremely high capital requirements. One such monopolistic firm is Microsoft, which has a monopoly over the production of the Windows Operating System. It accounts for about 95% of computer and microcomputer operating systems. Microsoft has had technological advancement. It entered the market early enough to monopolize it. The fact that Microsoft enjoys patent rights over its goods means that no other company can produce the Windows Operating System. Moreover, it has managed to tie Windows Media Player to its OS, thus giving it a notch over other potential threats. To avoid competition, it has also integrated the Internet Explorer web into Windows to beat competition from firms such as Netscape (Gavil & First, 2014)

Microsoft sells its commodities at a low price, thus making it hard for other firms to establish themselves. With the advancing technology, PCs are slowly being phased out because of the establishment of smaller and more efficient gadgets such as Tablets and Smartphones. Microsoft has modified the Windows OS to make it applicable to other gadgets, thus reducing the threat of its decline in the market. Moreover, the firm keeps innovating progressive versions of the Windows OS to provide new features as a way of ensuring that it does not lose its market share. Using its market power, Microsoft makes anticompetitive deals with producers of similar goods. Many of its contracts have been noted to have an anticompetitive effect. For a monopolistic firm to maximize its profit, it has to study the demand curve to determine the profit-maximization price (McEarchern, 2014).

Zero Economic Profit

According to Arnold (2014), Zero Economic Profit, also known as normal profit, is the revenue that a firm requires to satisfy the demand costs without making losses. It does not imply zero returns but average returns. It holds that the admission into an aggressive production will persist until all prospects for an encouraging financial revenue are diminished to zero. It does not reflect as a profit. It mostly occurs in perfect competition because the entry into the business by more firms drives down profits and prevents a firm from earning more than its operating costs. Producing at a price and output, where the marginal cost (MC) is equal to the marginal revenue (MR), maximizes profit for a competitive firm. When this price is above the average costs (AC), the firm receives a positive economic profit (McEachern, 2011).

Monopolistic competitive firms also have a zero economic profit in the end. An income earned by a firm in monopolistic competition in the short run often breaks even since the demand rises. Consequently, in the end, the companies in monopolistic competition will face a zero economic profit. The situation portrays the influence the company has on the market. Brand loyalty helps the firm to retain some clients even as it raises the cost of its products (Tragakes, 2011). The demand curve for a firm in a monopolistic competitive market will adjust such that it becomes tangent to the regular total cost. Subsequently, the firm will struggle to record an economic profit before it can break even.

Reference List

Arnold, R. (2014). Economics. Ohio: Cengage Learning.

Baumol, W., & Alan B. (2015). Microeconomics: Principles and Policy. Ohio: Cengage Learning.

Gavil, A., & First, H. (2014). The Microsoft Antitrust Cases: Competition Policy for the Twenty-first Century. Massachusetts, MA: MIT Press.

McEachern, W. (2011). Economics: A Contemporary Introduction. Ohio, Cengage Learning.

Sexton, R. (2015). Exploring Economics. Ohio: Cengage Learning.

Tragakes, E. (2011). Economics for the IB Diploma with CD-ROM. The United Kingdom: Cambridge University Press.