In the paper, it is mentioned that economists basically realize 4 kinds of markets i.e. perfect competition, monopoly, oligopoly, and monopolistic competition. Under perfect competition the firms are numerous and the buyers have perfect knowledge of the current market situation and hence the sellers are known as price takers because no one buyer or seller can influence the market to charge their desired market price and hence have to sell products at the price where the market tends to clear. In this form of competition there are only short term profits because there are virtually no barriers to entry and hence when the demand increases there are supernormal profits to be earned for a short period of time because when other suppliers see that the industry is earning supernormal profits they tend to move into the market to get their share of the market, this tends to increase the supply of the industry and the profit levels tend to decrease as more and more suppliers move into the industry. This type of earning of a share of the supernormal profit is known as hit and run competition because suppliers move in when the industry is earning supernormal profits and leave as soon as the supernormal profits are not earned any more due to increased supply. In conclusion, a firm in perfect competition is a price taker because of the perfect knowledge and the number of firms and the output decisions is influenced by the demand of the goods and the number of suppliers.
Monopolies consist of only one firm in the industry which is the sole supplier of the goods for that particular industry. Such a situation emerges when the firm has total control over the resources that are needed to produce that particular good, in this case, it is known as a ‘natural monopoly’. The other scenario could be that the firm could have set very high or very rigid barriers to entry and hence no other firm can break through these barriers to gain entry into the industry. The monopolistic firm can control either of the two things at a time the price of the goods, the quantity that they wish to sell.
The monopolist cannot control both because he cannot control demand, if he wishes to sell the product at a certain price then the demand curve for that industry or that good would determine what quantity of goods are sold at that particular price and if he wishes to sell off a particular quantity then the demand for that good would establish the price at which the good would clear the market. The monopolist power to influence price depends upon two factors: the number of substitutes and the power to restrict the entry of the firms into that particular industry
Monopolistic competition is one where there are a large number of firms in the industry producing similar products but no two products are the same hence the concept of brand image and quality is catered to in this market structure and hence products are differentiated, the firms are price makers. In order to change the price firms will have to tinker with the level of quantity. The monopolistic competition market earns normal profits in the long run because there are very few barriers to entry into the industry and hence only normal profits are earned in this kind of industry.