microeconomics

1 . What are the relationships between marginal cost and the supply curve for the purely competitive firm

When an industry is purely competitive , it also means no single firm can influence market price . This means that the firm 's demand curve is perfectly elastic and price equals marginal revenue . Given that a competitive firm holds no control over price , it could still influence how much output a firm should produce . As price remains constant regardless of how much the individual firm produces , a certain competitive firm always assumes that marginal revenue is

equal to the market price

This is for a reason that a purely competitive firm maximizing its marginal cost as it produces up to the point where marginal cost equals price . An analysis of short-run profit maximization by a competitive firm could be derived by comparing the by applying marginal analysis . A firm maximizes its short-run profit by producing the output at which greatest amount . Not many markets are purely competitive . But many are close enough so we can talk about almost ' pure competition situations - those in which the marketing manager has to accept the going price equilibrium , the price level is only high enough to keep the survivors in business . No one makes any profit - they just cover costs (Perrault McCarthy 2004 , Appendix A

Markets tend to become more competitive , moving toward pure competition (except in oligopolies . On the way to pure competition , prices and profits are pushed down until some competitors are forced out of business . Eventually , in long-run Thus , it is sensible to avoid pure competition and certainly fits with the emphasis on target marketing and the need to find a competitive advantage on which to differentiate the firm 's marketing mix . This is why diversifying the product of the firm is wise enough

2 . `Pure monopoly guarantees economic profits` , discuss whether this is a valid statement and show an illustration of such

As an imperfect form of market competition , pure monopoly could not , in any way , guarantee profit . This is because a monopolistic firm is the only supplier of the product it sells , with no close substitutes . The word monopolistic means that each firm is trying to get control in its own little market . But the word competition means that there are still substitutes . This just means that in a monopoly , there is a vigorous competition of a purely competitive market is reduced . Each firm has its own down-sloping demand curve . But the shape of the curve depends on the similarity of competitors ' products and marketing mixes . Each monopolistic competitor has freedom - but not complete freedom - in its own market (Mansfield , 1998

With this scenario , a pure competitor is destined to have only a normal profit in the long run and the barriers to entry mean that any economic profit realized by the monopolist can persist . However , in pure monopoly there are no new entrants to increase supply , thus this phenomenon drives down price and eliminates economic profit . As Figure 1 below represents...