ASSIGNMENT # 1

Subject name : MANAGERIAL ECONOMICS

Presented To: SIR NADIR

Presented By: IQRA RANI

Roll # 105

Class: BBA (Hons.)

Semester:6th

Department of Commerce & Business Administration

Government College University Faisalabad

Layyah Campus.
 G.C University Faisalabad, Sub Campus

Assignment: ______ONE ______ Subject:

TOPICS:

1. Why is perfect competition normally regarded as being "better"than

monoply?

2. Explain the problems for government policy if it tries to use supply- oriented

policies rather than demand-oriented ones in trying to discourage the consumption

of certain produts.

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Why is perfect competition normally regarded as being "better"than

monoply?

Perfect competition takes some assumptions into account, which will be described in the

following lines. However, it is important to note that it refers to a theoretical preposition and not

a reasonable, provable market configuration. Reality might approach it a few times, but only

scratching the shell.

As an Economics undergraduate, the closest I see from a perfectly competitive market in many

economies is agriculture.

A perfectly competitive market has 4 important elements:

1) Homogenuous product

2) Great number of intervenients

3) Perfect information

4) Free entry and exit

1. Homogenuous product refers to a non-differentiated product, which will commonly (but

not always) mean a commodity: how can you differentiate beans, rice, potatoes (in the farms, of

course)? You just can't.

buyer (demander) or seller (supplier) - will not affect the market significantly, be in terms of

pushing or restraining price or quantity.

3. All agents - buyers and sellers - have all the information about the product and the

market, so no one is actually in advantage at any possible aspect when negotiating (this usually

can be translated as 'every agent can be replaced easily').

4. There are no barriers to entry - nor exit. This is important, because only monopolies and

oligopolies present barriers. And why is that? That is because monopolies and oligopolies do

have economies of scale (besides other elements), which make it difficult or impossible for any

firm to join their markets; as, in our case, no agent detains any market power, it is perfectly

correct to assume there are no barriers for entry / exit.

Perfect competition is a market structure in which there are numerous sellers in the market,

selling similar goods that are produced/manufactured using a standard method and each firm has

all information regarding the market and price, which is known as a perfectly competitive

market.  Monopolistic competition is a type of imperfect market structure. In a monopolistic

competition structure, a number of sellers sell similar products but not identical products.

Products or services offered by sellers are substitutes of each other with certain differences. A

market can be described as a place where buyers and sellers meet, directly or through a dealer for

transactions.

Following the flowchart shows market structure –

 The entry and exit to such a market are free.

 This is a theoretical situation of the market, where the competition is at its peak.

 The firms don’t have price control, so they don’t have a pricing policy. The buyer or

seller doesn’t have control over prices. Therefore, a seller has to accept price determined

by market supply and demand forces.

 The product offered by all sellers is the same in all respect so no firm can increase its

price and if a firm tries to increase the price then it will lose its all demand to the

competitors.

What is a Monopolistic Competition?

 Monopolistic competition has features of both the market structures perfect competition

and monopoly. This kind of market structure is found in real life.

 Firms are selling products with certain differences in quality, quantity, etc features, so

firms have pricing control and pricing policies of firms that are in place.
  Entry and exit into the industry are easy because of fewer barriers.

 Product differentiation is one of the features of monopolistic competition, where products

are differentiated from each other on the basis of quality or brand.

 One of the differentiating parameters of the monopolistic competition is, it has a Highly

elastic demand curve.

Just a few examples of monopolistic competition include:

 Bars/nightclubs

 Coffee shops

 Grocery stores

 Pharmacies

 Gas stations

 Hotels

 Hardware/home improvement stores

 Furniture stores

 Landscaping/lawn care services

 Car washes

 Automotive service companies

 Dry cleaners

Monopolistic competition is a practical example of a market scenario, it can be seen around us.

Types of product or services provided by each market participants are differentiated. Products or
services can be differentiated in many ways such as brand recognition, product quality, value

addition to products or services or product placing etc. Head to Head ct

Below is the topmost Comparison between Perfect Competition vs

Monopolistic Competition are as follows –

Basic Comparison Perfect competition Monopolistic

between Perfect Competition

Competition vs

Monopolistic

Competition

Number of seller/buyers Many Many

Type of good/services Homogeneous Differentiated

offered

Does firm have pricing No – Price Takers Yes – some pricing power

control over their own

prices?

Is marketing/branding No Yes – Key non-price

Are entry barriers zero, Zero entry Barrier Low entry Barrier

low or high?

Does this market Yes, Price = MC Not Quite (P>MC)

structure lead to

allocated efficiency in

the long run?

Does this market Yes No

structure lead to

productive efficiency in

the long run?

Situation Unrealistic Realistic

Demand curve slope Horizontal, perfectly Downward sloping,

elastic relatively elastic

A relation between Average Revenue = Average Revenue >

Average Revenue (AR) Marginal Revenue Marginal Revenue.

and Marginal Revenue

(MR)

CONCLUSION:
It is better for the consumers because they will have access to more quantities of the good for a

lower price.The price in perfect competition is always lower than the price in the monopoly and

any company will maximize its economic profit (π) when Marginal Revenue(MR) = Marginal

Cost (MC).

Explain the problems for government policy if it tries to use supply- oriented policies

rather than demand-oriented ones in trying to discourage the consumption of certain

products.
Introduction

Government policies to increase economic growth are focused on trying to increase aggregate

demand (demand side policies) or increase aggregate supply/productivity (supply side policies)

Demand side policies include:

 Fiscal policy (cutting taxes/increasing government spending)

 Monetary policy (cutting interest rates)

Fiscal policy - involves changing the levels of government expenditure and taxation to try to

influence economic activity. We shall later be looking in more detail at the types of tax charged,

i.e. direct and indirect taxes, the amounts of the different taxes charged and how the sums raised

are spent. We shall also be looking how government spending influences the economy and what

happens if the government runs a deficit or surplus as part of its budget strategy.

Monetary policy - this mainly focuses on the use of interest rates and how lowering or raising

them influences economic behaviour. We shall concentrate on how their movement influences

aggregate demand and the control of inflation. We shall also examine how monetary policy

might affect money supply and the exchange rate and the role of the central banks in

implementing monetary policy.

Supply-side policies –
These are policies that aim to improve the ability of an economy to produce - in other words

policies that increase the productive potential of the economy. It is mainly free-market (classical)

economists that advocate their use. They tend to mean less government intervention and focus on

improving efficiency and productivity. By improving the economy's ability to produce at

competitive prices it is hoped that high levels of employment and low levels of inflation will be

maintained.

Supply side policies include:

 Privatization, deregulation, tax cuts, free trade agreements (free market supply

side policies)

 Improved education and training, improved infrastructure. (interventionist supply

side policies)

Supply-side policies are designed to make aggregate supply (AS) more responsive to changes in

national income. When combined with other macro policies they are supposed to deliver a

competitive economy. They are normally focused on:

 Removing market imperfections - barriers to the smooth operation of markets

 Removing restrictive practices - rules that do not allow the free movement of factors

within an economy

 Making work more attractive and workers more efficient

Problems for government policy if it tries to use supply- oriented policies rather than

demand-oriented ones in trying to discourage the consumption of certain products.

government might provide a subsidy to farmers to make their businesses

more profitable and encourage farm production. Conversely, the

government might put a tax on cigarettes and alcohol to discourage

behavior that it doesn't approve of. 

2. Governments can also alter markets when they decide to spend money.

Any individuals or businesses that receive government funds receive, in

effect, a wealth transfer from every other taxpayer. If a business receives a

subsidy from the government, it produces at a higher cost curve than is

possible without the subsidy. All other actors that might have received

those funds (were it not for the taxation and subsidy) have

correspondingly less income or revenue.

3. In product markets, profits may suffer as a result of competition policy,

and in labor markets the interests of trade unions may be threatened by

labour market reforms. They can also help create real jobs and sustainable

growth through their positive effect on labor productivity and

competitiveness. 

4. Lower taxes rates, reduced union power, and privatization have all

contributed to a widening of the gap between rich and poor.

5. Supply-side policy can take a long time to work its way through the

economy. For example, improving the quality of human capital, through

education and training, is unlikely to yield quick results. The benefits of

and this may also take a long time.