Resume of Principles of Economics

Name : Wanda Aulia Pratiwi

NIM : 2201026127
Study Program : S1- Management

Firms in Competitive Market (Chapter 14)

Competitive market is a market where there are many buyers and sellers trading identical
products, so that each of them will be a price taker. Agriculture is a good example of a
competitive market. Each farmer has a small market share and is unable to determine output or
market prices. A perfectly competitive market, has two characteristics, namely; in that market
there are many buyers and many sellers, and the goods offered by the sellers are generally same.
Apart from the two characteristics mentioned above, there is one more characteristic that marks a
perfectly competitive market, namely; each company can freely leave or enter the relevant
market. An example of perfect market competition can be seen in the operation of a rice
company in Indonesia. According to the characteristics of a perfectly competitive market, the
number of buyers and sellers of rice is very large because rice is a basic need in Indonesia. Each
buyer and seller has no power to influence the price.

Average revenue is the total revenue divided by the quantity of products sold, the relationship
between average income and the amount of output produced depends on the structure of the
market. For perfectly competitive firms, not only does average revenue equal price, but more
importantly, it equals marginal revenue, which are all constant. The relationship between average
revenue and the amount of output produced depends on market structure. For a perfectly
competitive firm. Marginal revenue is the change in total revenue derived from the sale of one
additional unit of product. But more importantly, it equals average revenue which are all
constant. Because every competitive firm is a price taker, its income is proportional to the
quantity of output it produces. The price of goods will be equal to the average revenue and
marginal revenue received in the company. A competitive firm is a price taker.

In the short run, even though a company cannot save its fixed costs, if the price of the goods it
sells is lower than the average variable cost, it would be better if the company chooses to close or
temporarily stop production, shut down temporarily. In the long run, if prices are ower than
average total cost and the firm has a chance to save its fixed and variable costs, then it woul be
better off choosing to exit the market entirely. Long term equilibrium of a competitive market
where firms can freely enter and exit will be created if this market has a number of firms capable
of operating on an efficient scale. Because entry and exit of firmscan occur more easily in the
long run than in the short run, the long run supply curve is usually more elastic than the short run
supply curve. Basically, because the firms marginal cost curve determines how much the firm is
willing to produce based on the current price level in the market, it is also the competitive firms
supply curve.
Monopoly (Chapter 15)
Monopoly is a company that is the sole seller of a product that has no subtitutes. The main
characteristic of a monopoly market itself can be started from three sources, namely; key
resources controlled by a single company, the goverment grants exclusive rights to a single
company to produce and sell certain goods, production costs are more efficient when there is
only one single producer making the product rather than many firms. In Indonesia, some
examples of monopolies are PLN, Pertamina, and PDAM where the three companies are used
as the main suppliers of electricity, fuel and clean water for the needs of the community.
Natural monoply is a monopoly that arises because a single company can supply a goods or
service to the entire market at a lower cost than if the goods or service is provided by two or
more companies.

The most important difference between a competitive firm and a monoplist is that a monopoly is
able to influence the price of its output. In a competitive firm, price equals marginal cost.
Whereas in a market controlled by a monopolist, price exceeds marginal cost, Because the
monopoly is the sole producer in the market, it faces a downward-sloping demand curve for its
product. Price discrimination is a business practice of selling similar goods by charging different
prices to different customers. Firms in our economy use various business strategies aimed at
charging different prices to different customers. Examples of price discrimination is movie
tickets, airline prices, discount coupouns, financial aid, and quantity discounts. The Price
Discrimination Benefit is It is a rational strategy for a monopoly that maximizes profits, the
ability for monopolists to differentiate consumers on the basis of their willingness to pay, can
improve social welfare

The quantity of output that maximizes the monopolist's profit is determined by the point of
intersection of the marginal revenue curve and the marginal cost curve. The socially efficient
quantity of production can be found at the intersection of the demand curve and the marginal
cost curve. The level of production that a monopolist would choose would be lower than the
socially efficient level of production. Policy makers in government can deal with this monopoly
problem in one of four ways:

1.Encouraging monopoly industries to become more competitive.

2. Regulating monopoly behavior
3. Changing all or part of a private monopoly company to become a state-owned company.
4. Leaving things as they are.

Arbitrage is the process of buying goods in one market at a lower price and reselling them in
another market at a higher price in order to make a profit from the difference in price. Just like
a competitive firm, a monopolist always wants to maximize profits, and this can be done by
producing at a level where marginal revenue equals marginal cost.

Monopolistic Competition (Chapter 16)

Monopolistic competition is a market structure where there are many companies selling
various products. There are three main characteristics of monopolistic market competition,
namely the existence of many companies, differentiated products and the relatively easy entry
and exit process. We can formulate two general characteristics that characterize long-run
equilibrium for a monopolistically competitive market. The second feature is:

1. As in a monopoly market, price in a monopolistically competitive market exceeds marginal

cost. We draw this conclusion because profit maximization requires that marginal revenue
equal marginal cost, and because a downward-sloping demand curve makes marginal revenue
less than price.

2. As in a competitive market, the price in a monopolistic competition market is also the same
as the average total cost. We can base this conclusion on the fact that there is a free exit from
the company that drives zero economic profit.

Equilibrium in monopolistic market competition is different from that in perfect market

competition for two reasons. First, every firm in a monopolistically competitive market has
excess production capacity. That is, the firm is operating on the curved portion of the average
total cost curve. Second, each monopolistically competitive firm charges a price that is higher
than its marginal cost. The monopolistically competitive firm in the short run, each firm in a
monopolistically competitive market is, in many ways, like a monopoly. Because its product is
different from those offered by other firms, it faces a downward-sloping demand curve. (By
contrast, a perfectly competitive firm faces a horizontal demand curve at the market price.)
Thus, the monopolistically competitive firm follows a monopolist's rule for profit maximization.
The long run equilibrium, entry increases the number of products from which customers can
choose and, therefore, reduces the demand faced by each firm already in the market. In other
words, profit encourages entry, and entry shifts the demand curves faced by the incumbent
firms to the left. As the demand for incumbent firms' products falls, these firms experience
declining profit. The product differentiation inherent in monopo- listic competition leads to the
use of advertising and brand names. Critics of advertising and brand names argue that firms use
them to manipulate consumers' tastes and to reduce competition. Defenders of advertising and
brand names argue that firms use them to inform consumers and to compete more vigor-ously
on price and product quality.

Monopolistic competition is true to its name: It is a hybrid of monopoly and competition. Like a
monopoly, each monopolistic competitor faces a downward- sloping demand curve and, as a
result, charges a price above marginal cost. As in a perfectly competitive market, there are
many firms, and entry and exit drive the profit of each monopolistic competitor toward zero in
the long run. The theory of monopolistic competition seems to describe many markets in the
economy. It is somewhat disappointing, therefore, that the theory does not yield simple and
compelling advice for public policy. From the standpoint of the economic theorist, the
allocation of resources in monopolistically competitive markets is not perfect. Yet from the
standpoint of a practical policymaker, there may be little that can be done to improve it.

Oligopoly (Chapter 17)

Oligopoly is a market structure where there are only a few or a few companies selling identical
or similar products. Examples, cigarette company, aviation service industry, vehicle industry,
cement company, cellphone manufacturer, telecommunications operator, Instant noodle
manufacturer, etc. Duopoly is the simplest type of oligopoly. Oligopolies with three or more
members face the same problems as duopolies. Some examples of the duopoly that has
occurred in Indonesia are Indofood (Indomie) and Wings Food (Mie Sedap) in the Instant
Noodle market competition. Both of them control the market share of more than 90%.

Collusion is such an agreement among firms over production and price, and the group of firms
acting in unison is called a cartel. Once a cartel is formed, the market is in effect served by a
monopoly, a cartel must agree not only on the total level of production but also on the amount
produced by each member. Monopolies want to establish cartels and earn monopoly profits,
but this is often not possible. Disputes among cartel members over how to distribute profits in
the market can make it difficult for members to agree. In addition, antitrust laws prohibit
explicit agreements between monopolies as part of public policy. Even discussing pricing and
production constraints with competitors can be a criminal offence. monopolies pursue their
own self-interest when deciding how much to produce, then they produce a larger total than
the monopoly quantity, charge less than the monopoly price, and make a low total profit than
monopoly profits. Although the logic of self-interest increases monopolistic production on. At
the monopoly level, it discourages monopolies from approaching competitive allocation.

Nash equilibrium is a situation where economic actors interact with each other, and the best
strategy for each party is determined by what is considered the best strategy by the other
party. If the firms in an oligopoly market determine production separately in order to maximize
profits, they will produce at a quantity that is greater than the monopoly production level but
still lower than the competitive production level. The price they receive is less than the
monopoly price, but still greater than the competitive price (which equals marginal cost).

The more sellers in an oligopoly market, the closer its nature to a competitive market. Prices
will increasingly approach marginal cost, and the quantity produced approaches socially
efficient levels. Game theory is the study of how people behave in strategic situations.
Prisoners' dilemma is a form of “game” between two prisoners which illustrates the difficulty of
maintaining cooperation, even if cooperation is known to be profitable. Dominant strategy is
the best strategy for a player in a game, regardless of any strategy chosen by other players.
Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that
reduces competition. The application of these laws can be controversial, because some
behavior that can appear to reduce competition may in fact have legitimate business purposes.