An Assignment

On
Microeconomics in the context of South African Mobile Telecom
Sector

Submitted By:

Submitted To:

Date of Submission:
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Table of Contents
Executive Summary:...................................................................................................................................... 6
Introduction: ................................................................................................................................................. 7
Methodology:................................................................................................................................................ 7
1.1 Market Structure of South African Mobile Telecommunication Industry: ............................................. 7
Features of market structure: ................................................................................................................... 7
Monopoly: ................................................................................................................................................. 8
Oligopoly: .................................................................................................................................................. 8
Assumptions to Oligopoly and South African Telecom In Light Of Oligopoly: ...................................... 8
Perfect competition: ................................................................................................................................. 9
Assumptions to Perfect Competition:................................................................................................... 9
1.2 Barriers to entry exit in this industry: ................................................................................................... 10
Some barriers to entry exit into or from market: ................................................................................... 10
Economies of Scale: ............................................................................................................................ 10
Common/ Geographical Barriers: ....................................................................................................... 10
Brand Loyalty through advertising: ..................................................................................................... 11
Breaking point Pricing: ........................................................................................................................ 11
Predatory Pricing:................................................................................................................................ 11
Vertical Integration: ............................................................................................................................ 11
Legitimate Patents: ............................................................................................................................. 11
Learning and expertise:....................................................................................................................... 11
Being the first mover in the industry: ................................................................................................. 11
System effects: .................................................................................................................................... 11
2.1 Actions to combat potential abuse of market power: .......................................................................... 12
2.2 Kinked demand curve in the context of telecom sectors of South Africa: ........................................... 12
The kinked demand curve model of oligopoly in the context of South African telecom sector: ........... 13
The importance of non-price competition under oligopoly in the context of kinked demand curve: ... 14
Price leadership tacit collusion: ........................................................................................................... 15
Explicit collusion under oligopoly: .......................................................................................................... 15
Collusion in a market or industry is easier to achieve when: ................................................................. 16
Conceivable break-downs of cartels: ...................................................................................................... 16
3.1 Monopolist in South African telecom before 2003: ............................................................................. 16
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Types of Monopoly: .............................................................................................................................. 17

Perfect Monopoly: .............................................................................................................................. 17
Imperfect Monopoly: .......................................................................................................................... 17
Private Monopoly: .............................................................................................................................. 18
Public Monopoly: ................................................................................................................................ 18
Straightforward Monopoly: ................................................................................................................ 18
Separating Monopoly:......................................................................................................................... 18
Legitimate Monopoly: ......................................................................................................................... 18
Natural Monopoly: .............................................................................................................................. 18
Joint Monopoly: .................................................................................................................................. 18
Engineering Monopoly: ....................................................................................................................... 18
Monopoly, Characteristics: ..................................................................................................................... 18
Single Supplier:.................................................................................................................................... 19
Unique Product: .................................................................................................................................. 19
Obstructions to Entry and Exit: ........................................................................................................... 19
Specific Information: ........................................................................................................................... 19
Advantages and Disadvantages of a Monopoly Market ......................................................................... 19
Advantages:......................................................................................................................................... 19
Disadvantages: .................................................................................................................................... 20
3.2 Benefits of perfect competition: ........................................................................................................... 20
Perfectly competitive markets exhibit the following characteristics: .................................................... 20
Assumptions behind a Perfectly Competitive Market: ........................................................................... 21
Short run price and output for the competitive industry and firm: ....................................................... 21
The Effects of a change in Market Demand: ........................................................................................... 23
Benefits of perfectly competitive market structure: .............................................................................. 24
4.1 Profit maximizing or loss minimizing rule in the context of perfectly competitive market: ................ 24
Perfect Competition, Loss Minimization or Profit Maximization: .......................................................... 24
One of Three Alternatives: .................................................................................................................. 25
Profit Maximization Rule: ....................................................................................................................... 25
4.2 Profit maximizing or loss minimization rule in the context of economic profit, normal profit, and
economic loss:............................................................................................................................................. 26
Normal profit: ......................................................................................................................................... 26
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Economic Profit: ...................................................................................................................................... 27

Economic loss:......................................................................................................................................... 28
Conclusion: .................................................................................................................................................. 30
Bibliography: ............................................................................................................................................... 31

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Page 5 of 31

Executive Summary:
The economy of a country is related with the production and consumption of goods and services
to the consumers and through this way maintain the balance of consumers demand and supply.
The outputs produce in the firm goes to the market place to go to the final consumers. Depending
on the structures of these markets, the price quality, availability, switching cost may be differed.
Basically the market structures of a country define the different characteristics of a market.
These characteristics can be the organizational characteristics or the competitive characteristics.
The South African mobile telecom sectors sometime are in the monopoly or sometime in the
oligopoly and finally in the perfectly competitive situation. The monopoly market has only one
seller such as MTN but many buyers. The oligopoly market has two sellers such as MTN and
Vodacom who dominate the market together and set the price by discussing between themselves.
The perfectly completive market ensures different sellers and ensures the competitive price
among the sellers. When the Virgin enters into the telecom sectors, the market becomes
competitive. The perfectly competitive market ensures the proper allocation of resources and
information to every party of the economy. It also ensures the profit maximization in the context
of normal profit, super normal profit and economic loss.

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Introduction:
Economy of a country ensures the proper allocation of resources to the every one of the country.
The different products made by the different firms in the economy are supplied to the different
markets. The price nature of competition depends on the structure of the market of a nation. The
South African mobile telecom sectors experienced different market structure at different time.
These market structure provides different advantages or disadvantages to the both different firm
and the consumers. To enter into an established market sector is so tough. But dedication and
hard work can ensure the entrance of the marketplace such as the Virgin telecom in South
African telecom sectors. After their seven years war Virgin enters into the Telecom sectors of
South Africa.

Methodology:
To prepare this essay a huge study is made on the microeconomics. And specially certain part
such as kinked demand curve, profit maximization, market structures, different profit etc. the
data used here are secondary collects from different websites, journals, books and periodicals.
That means all the data are presented here are secondary. Several graphs on relevant ideas are
given on this essay. Then all the collected data are documented using Microsoft word.

1.1 Market Structure of South African Mobile Telecommunication

Industry:
Market structure is characterized by economists as the attributes of the market. It could be
hierarchical attributes or aggressive qualities or other peculiarities that can best depict a products
and administrations market. The real Characteristics that economist have focused on in
portraying the market structures are the way of rivalry and the mode of valuing in that market

Features of market structure:

The number of firm working in a market; It will blanket both the nearby and remote
markets.
The focus proportion of organization; this will demonstrate the market offer held by the
extensive organizations.
The sum and nature of expenses in the market; It will demonstrate how the diverse
expenses influence the contestability in the market. It will incorporate the economies of
scale and the vicinity of sunken expenses.
The level of vertical mix; Vertical reconciliation is the methodology of joining together
the diverse phases of creation and appropriation to be overseen by a solitary endeavor.
the levels of item
The market structures that are existing in the South African mobile telecom industry are
discussed in the following section.
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Monopoly:
It is a market structure described by a single seller, offering a remarkable item in the market.
A market structure described by a single seller, offering a remarkable item in the market is called
imposing business model market. In a restraining infrastructure market, the seller confronts no
rival, as he is the sole seller of merchandise with no nearby substitute.
In an imposing business model market, elements like government permit, responsibility for,
copyright and patent and high beginning expense make an element a single seller of
merchandise. All these elements confine the passage of different sellers in t

Oligopoly:
Oligopoly could be characterized as a market structure with a little number of extensive players
likewise called as Oligopolists. These vast players have a noteworthy offer of the aggregate
market size. Colossal rivalry is focused inside these contenders

Assumptions to Oligopoly and South African Telecom In Light Of Oligopoly:

Few Sellers:
There are few solid and powerful firms working in an oligopoly and are going up against one
another. The other few firms working in the market are not overwhelming and have a subtle offer
of the market.
Interdependence:
It is one the most highlighted peculiarity of oligopoly. Reliance is as far as choice making
techniques. This happens in light of the fact that, the quantity of powerful contenders is few, and
the change in value or yield by any of the firm causes immediate impact on the wage of its rival
Entry and exit barriers:
The barriers are high to enter and passageway the industry. It is one of the numerous reasons;
firms in oligopoly have more noteworthy control inside the industry. There could be numerous
barriers to enter this industry, some on account of the way of the industry and some in light of
the fact that the occupant firms go about as solid divider. Telecom is an exceptionally innovation
driven part. Access to the engineering normally obliges a considerable measure of venture.
Responsibility for permit likewise speaks to immense section obstruction.
Homogeneous or differentiated products:
There is no situated standard in an oligopoly about homogeneity or separation of the
item/benefit. It fluctuates starting with one industry then into the next. In mobile telecom, the
item is same.

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Non price competition:

The opposition in oligopoly is not limited to cost, however different perspectives that a buyer
takes a gander at. This is additionally a champion gimmick of oligopoly. Non-value rivalry in
telecom would incorporate rivalry over a) superior scope of system b) big name supports c)
marking d) forceful promoting methods e) better client administration f) expanding into related
product offering.
Ability to set price:
Dissimilar to perfect competition, the prevailing firms in oligopoly have the focal point to set the
price of the item. The way of oligopoly is such, that industry is the price setter as opposed to
price taker.

Perfect competition:
Perfect competition, as the name itself recommends, is the most competitive type of monetary
structure. Unadulterated Perfect competition scarcely exists. 1. As indicated by an article [oxford
journal] perfect competition implies a state of undertakings in which the interest for the yield of
an individual dealer is perfectly versatile.

Assumptions to Perfect Competition:

Many buyers and sellers:
Under this market structure, there are huge number of buyers and merchants of the item. Every
vender is so little there is no option impact the price of the ware through a change in its price;
each one firm is a price taker.
Homogeneous product:
The product sold in the market is an identical (same) product. Same product is being made to be
supplied in the market by every firm. The outputs can be received as a perfect substitute.
No entry or exit barriers:
Not at all like the suspicion of oligopoly, does perfectly competitive not have any barriers to
enter or passageway the industry. Market is interested in any firm who decides to be a merchant
of the product
Perfect information:
It is expected that each purchaser and each dealer in the market knows everything about the
product. On the off chance that any firm charges higher price than the market price of the
product, the customers will move away towards the product of different firms.

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1.2 Barriers to entry exit in this industry:

Barriers to entry are factors that avoid or make it troublesome for new firms to enter a market.
The presences of barriers to entry make the market less contestable and less competitive. The
more prominent the barriers to entry which exist, the less competitive the market will be.
In the initial level of industry barriers to entry in the market is more because there are only one
or two firm dominating the market such like as MTN and Vodacom in south African mobile
telecom industry. The entry barriers that can face a new firm to entry in the market such like as
virgin mobile company face are given below.

Some barriers to entry exit into or from market:

Economies of Scale:
Economies of scale happen when expanded yield prompts lower normal expenses. Consequently
new firms, with moderately low yield, will think that it hard to contend in light of the fact that
there normal expenses will be higher than the occupant firms profiting from economies of scale.
The
possibility
of
higher
normal
expenses
may
hinder
entry.

A firm producing at Q1 has lower average costs. If a new firm enters and generates Q2,the
average cost become uncompetitive.

Common/ Geographical Barriers:

Zimbabwe has 85% of the world supply of Chromium. On the off chance that you don't have oil
in your nation, you can't enter the oil market. Land barriers could be more neighborhood, e.g. in
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the event that you don't have entry to a decent area for a theater in say Covent Garden, it creates
an obligation to entry.

Brand Loyalty through advertising:

Developing buyer dedication through establishing a solid brand picture can prevent entry. With
an exceptionally solid brand picture another firm would need to use a ton of cash on advertising,
which are a sunken expense and a hindrance to entry.

Breaking point Pricing:

This happens when a firm sets price sufficiently low to stop entry. Syndication may participate in
farthest point pricing despite the fact that it implies less profit; it wants to keep prices lower to
avoid competition. It is identified with economies of scale.

Predatory Pricing:
This happens when an incumbent firm reacts to another firm entering the market by starting a
price war and trying to push the adversary firm out of business. It is unlawful so it might be hard
to execute in practice.

Vertical Integration:
Vertical integration happens when a firm has control over the supply and appropriation of the
great. Case in point, oil organizations can keep the price of petrol high to debilitate new petrol
retailers.

Legitimate Patents:
A legitimate patent can give an unadulterated syndication in light of the fact that other firms can't
utilize its patent (e.g. a pharmaceutical organization can get a medication patent for 7 years,
meaning nobody else can offer that specific medication.

Learning and expertise:

Gained as a matter of fact e.g. Microsoft and Google are both built mechanical monsters.
Numerous years of operating in the markets will provide for them learning and expertise. This
may be troublesome for new firms to make up for lost time.

Being the first mover in the industry:

In a few industries, being the first firm to get secured gives an enormous playing point. Google
wasn't the first internet searcher, however now it has dominated the market and is often
preinstalled on programs.

System effects:
In numerous industries, the achievement of the business obliges a firm to have a discriminating
mass of clients. This is especially the case with online networking. Individuals don't pick
fundamentally the best specialized online networking yet the ones their companions
utilization.
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2.1 Actions to combat potential abuse of market power:

The measure of a business, even one that dominates a specific market, is not, of itself, a
foundation for concern. Businesses may need to wind up substantial to attain lower production
costs or to go up against outside and residential competitors. The misuse of dominant position
segments of the Competition Act may apply when the greater parts of the following criteria are
met:
The dominant firm or firms have market power that is the capacity to situated prices
above competitive levels.
The dominant firm or firms participate in hostile to competitive acts business polishes
that are intended to decrease competition. These practices include: buying up a
competitor's customers or suppliers; using "fighting brands"
The hostile to competitive acts have considerably diminished competition, or are prone to
do so. This can happen when against competitive acts eliminate an adversary or avert
such things as a rival's entry into a market, potential competition, product innovation and
lower prices.
The Act's ill-uses of dominant position areas don't punish an organization that has caught
a dominant offer of the market as a result of its better
Some actions have already taken by the South African government to protect the misuse of
market power.
1.
2.
3.
4.
5.
6.
7.

Government provides more incentives to enter new firm into mobile telecom sectors
Enforce flexible laws and regulations in the context of mobile telecom sector
Discourage the practice of monopoly or oligopoly
Reduce the infrastructure cost of telecom industry
Encourage firm to practice perfectly competitive market
Reduce the tax on airtime and all others services on mobile telecom
Take proper actions to reduce the syndications

2.2 Kinked demand curve in the context of telecom sectors of South

Africa:
Oligopoly alludes to a market structure where an industry is dominated by a little number of
extensive merchants. Since there are few members in this kind of market, every oligopolistic is
mindful of the activities of the others. The choices of one firm influence, and are influenced by,
the choices of other firms.

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The kinked demand curve model of oligopoly in the context of South

African telecom sector:
The kinked demand curve model created first by the economist Paul Sweeny accept that a
business may confront a double demand curve for its item focused around the feasible responses
of different firms in the market to a change in its cost or an alternate variable. The basic
presumption of the hypothesis is that organizations in an oligopoly are looking to ensure and
keep up their market offer and that opponent firms are unrealistic to match an alternate's cost
build however may match a value fall. I.e. opponent firms inside an oligopoly respond lopsidedly
to
a
change
in
the
cost
of
an
alternate
firm.

In the event that a business raises cost and others leave their prices steady, then we can expect
very much a vast substitution impact far from this firm making demand generally value versatile.
The business would then lose market impart and hope to see a fall in its total revenue.
In the event that a business decreases cost however different firms go with the same pattern, the
relative value change is much more modest and demand would be inelastic in admiration of the
value change. Cutting prices when demand is inelastic additionally prompts a fall altogether
revenue with next to zero impact on market offer.
The kinked demand curve model hence makes a forecast that a business may achieve a stable
profit-maximizing equilibrium at value P1 and yield Q1 and have minimal impetus to modify
prices.

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The kinked demand curve model predicts times of relative cost security under an oligopoly with
organizations concentrating on non-cost rivalry as a method for fortifying their market position
and expanding their super ordinary profits.
Fleeting value wars between adversary firms can even now happen under the kinked demand
curve model. Amid a value war, firms in the market are trying to grab a transient playing point
and
win
over
some
additional
market
offer.

The necessaries of non-price rivals under oligopoly in the context of

kinked demand curve:
Non-price competition accepts expanded vitality in oligopoly markets. Non-price rivals entails
publicizing and marketing methods to expand demand and create brand devotion among buyers.
Organizations will utilize different approaches to build market offer:
Better nature of administration including ensured conveyance times for buyers and
minimal effort adjusting understandings
Longer opening hours for retailers, 24 hour phone and online client help
Extended guarantees on new items
Discounts on item overhauls when they get to be accessible in the market
Contractual associations with suppliers - for instance the arrangement of tied houses for
pubs and contractual concurrences with establishments (select dissemination
understandings)

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Price leadership tacit collusion:

Another type of oligopolistic behavior is price leadership. This is when one firm has a clear
dominant position in the market and the firms with lower market shares follow the pricing
changes prompted by the dominant firm. Firms who market to consumers that they are never
knowingly undersold or who claim to be monitoring and matching the cheapest price in a given
geographical area are essentially engaged in tacit collusion. Tacit collusion occurs where firms
undertake actions that are likely to minimize a rival response, e.g. deleting price cut or not
compete in the market.

Explicit collusion under oligopoly:

It is frequently watched that when a market is ruled by a couple of substantial firms, there is
dependably the potential for organizations to try to diminish market vulnerability and take part in
some manifestation of conniving conduct. At the point when this happens the current firms
choose to take part in price fixing assertions or cartels.
.

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Collusion in a market is so easy to achieve when:

1. There is just a little number of firms in the business and boundaries to entrance secure the
syndication force of existing firms over the long haul.
2. Market demand is not excessively variable
3. Demand is decently inelastic concerning cost so that a higher cartel cost expands the aggregate
income to suppliers in the business sector
4. Each association's yield could be effortlessly checked this empowers the cartel all the more
effectively to control aggregate supply and distinguish firms who are undermining yield shares.

Conceivable break-downs of cartels:

Most cartel courses of action experience troubles and pressures and some maker cartels
categorize whole. A few variables can make issues inside a tricky understanding between
suppliers:
Enforcement issues: The cartel means to confine downright creation to boost aggregate
profits of parts.
Falling business sector demand amid a log jam or subsidence makes abundance limit in
the business and puts weight on individual firms to slice costs to keep up their income.
the fruitful entrance of non-cartel firms into the business undermines a cartel's control of
the business e.g. the development of online retailers in the book business in the

3.1 Monopolist in South African telecom before 2003:

Before 2003, in South Africa only one firm were dominate the mobile telecom sector that create
the monopolist situation in the South African mobile telecom sectors. After that many firms such
as Virgin mobile telecom try to enter into the industry. After a long war they are retained in the
competition.
Monopoly business model is a type of business sector structure of imperfect competition,
predominantly portrayed by the presence of a sole vender and numerous purchasers. This sort of
business is regularly connected with section and passageway obstructions.
These gimmicks give the monopolist the capability to set prices with the main constraint of
customers' ability to pay. Along these lines, in imposing business models, the vender is a pricecreator and purchasers will be price-takers. The firm will pick its production output (q) and price
(p) to maximize revenue (). The ideal condition, where we'll have marginal cost (MC) meets
marginal revenue (MR), is given by

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Types of Monopoly:

Perfect Monopoly:
It is additionally called as supreme imposing business model. For this situation, there is just a
solitary merchant of item having no nearby substitute; not by any means remote one. There is
completely zero level of rivalry. Such imposing business model is basically exceptionally
uncommon.

Imperfect Monopoly:
It is likewise called as relative syndication or straightforward or restricted restraining
infrastructure. It alludes to a solitary dealer market having no nearby substitute. It implies in this
market, an item may have a remote substitute. In this way, there is alarm of rivalry to some
degree e.g. Portable (Cellphone) telecom industry (e.g. Virgin) is having rivalry from altered
landline telephone administration industry (e.g. BSNL).
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Private Monopoly:
At the point when creation is possessed, controlled and oversaw by the individual, or private
body or private association, it is called private imposing business model. e.g. Tata, Reliance,
Bajaj, and so forth aggregates in India. Such sort of imposing business model is benefit arranged.

Public Monopoly:
At the point when generation is claimed, controlled and oversaw by government, it is called open
imposing business model. It is welfare and administration turned. In this way, it is additionally
called as 'Welfare Monopoly' e.g. Tracks, Defense, and so on.

Straightforward Monopoly:
Straightforward imposing business model firm charges an uniform value or single cost to all the
clients. He works in a solitary market.

Separating Monopoly:
Such a syndication firm charges diverse cost to distinctive clients for the same item. It wins in
more than one market.

Legitimate Monopoly:
At the point when imposing business model exists because of trademarks, licenses, duplicate
rights, statutory regulation of government and so on., it is called legitimate restraining
infrastructure. Music industry is a case of legitimate imposing business model.

Natural Monopoly:
It develops as an aftereffect of common points of interest like great area, copious mineral assets,
and so on e.g. Bay nations are having imposing business model in unrefined petroleum
investigation.

Joint Monopoly:
Various business firms gain restraining infrastructure position through amalgamation, cartels,
syndicates, and so forth it gets to be joint syndication

Engineering Monopoly:
It develops as an aftereffect of economies of extensive scale creation, utilization of capital
products, new generation techniques, and so forth e.g. Designing merchandise industry, auto
industry, programming industry, and so forth.

Monopoly, Characteristics:
The main characteristics of monopoly market structure are given below.
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Single Supplier:
The quintessence of an imposing business model is a business controlled by a solitary merchant.
The single vender, obviously, is an immediate complexity to flawless rivalry, which has
countless. The most vital part of being a solitary dealer is that the syndication merchant IS the
business sector. The business sector demand for a decent IS the demand for the yield delivered
by the restraining infrastructure.

Unique Product:
To be the main dealer of an item, nonetheless, an imposing business model must have an
extraordinary item.

Obstructions to Entry and Exit:

Syndication is by and large guaranteed of being the ONLY firm in a business sector due to
grouped boundaries to entrance. A portion of the key hindrances to entrance are: (1) legislature
permit or establishment, (2) asset possession, (3) licenses and copyrights, (4) high start-up
expense, and (5) diminishing normal total expense.

Specific Information:
Restraining infrastructure is regularly portrayed by control of data or generation innovation not
accessible to others. This particular data frequently comes as lawfully settled licenses,
copyrights, or trademarks. While these make lawful obstructions to passage they additionally
show that data is not splendidly imparted by all.

Advantages and Disadvantages of a Monopoly Market

A monopoly market exists when there is enormous number of purchasers yet little or
exceptionally predetermined number of dealers in the market. Like another market structure a
monopoly market has its points of interest and disservices to both the purchaser and the vender.

Advantages:
Steadiness of prices:
In a monopoly market the prices are the vast majority of the times stable. This happens on the
grounds that there is stand out firm included in the market that sets the prices if and when it feels
like
Wellspring of income for the legislature:
The legislature gets income in manifestation of tariff from monopoly firms.
Monstrous profits:
Because of the unlucky deficiency of contenders which prompts high number of offers monopoly
firms have a tendency to get super profits from their operations.

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Monopoly firms offer a few administrations viably and proficiently.

Disadvantages:
Exploitation of consumers:
A monopoly market is best known for consumer exploitation. There are in reality no contending
products and accordingly the consumer gets a crude arrangement as far as amount, quality and
estimating.
Dissatisfied consumers:
Consumers get a crude arrangement from a monopoly market in light of the fact that quality will
be traded off. Therefore it is not a wonder to see extremely disappointed consumers who often
grumble about the company's products
Higher prices:
No competition in the market implies unlucky deficiency of such things as value wars that may
have profited the consumer and as an aftereffect of this monopoly firms have a tendency to
charge higher prices on goods and services henceforth inconveniencing the purchaser.
Price discrimination:
Monopoly firms are additionally once in a while known for drilling value discrimination where
they charge different prices on the same product for different consumers.
Inferior goods and services:
Competition is insignificant or completely truant and thusly the monopoly firm may
energetically deliver substandard goods and services on the grounds that after all they know the
goods won't neglect to offer.

3.2 Benefits of perfect competition:

A perfectly competitive market is a theoretical market where rivalry is grinding ways most
noteworthy conceivable level. Neo-traditional economists contended that flawless rivalry would
deliver the best conceivable results for shoppers, and society.

Perfectly competitive markets exhibit the following characteristics:

There is impeccable learning, with no data disappointment or time slacks. There are no
obstructions to section into or passageway out of the market.
Firms produce homogeneous, indistinguishable, units of yield that are not marked.
Each unit of data, for example, units of work, are likewise homogeneous.
No single firm can impact the market value, or market conditions. The single firm is said
to be a value taker, taking its cost from the entire business.
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 There are expansive quantities of firms in the market.

There is no requirement for government regulation, but to make markets more
competitive.
There are thought to be no externalities, which are no outside expenses or profits.
Firms can just make typical benefits over the long haul, yet they can make anomalous
benefits

Assumptions behind a Perfectly Competitive Market:

1. Numerous suppliers each with an irrelevant offer of the market this implies that each one
firm is excessively little in respect to the general market to influence price by means of a change
in it supply every individual firm is thought to be a price taker
2. An indistinguishable yield delivered by each one firm at the end of the day, the market
supplies homogeneous or institutionalized items that are flawless substitutes for one another.
3. Shoppers have impeccable data about the prices all dealers in the market charge so if a few
firms choose to charge a price higher than the decision market price, there will be a huge
substitution impact far from this firm
4. All firms (industry members and new participants) are expected to have equivalent access to
assets (engineering, other variable inputs) and changes in generation advances attained by one
firm can overflow to the various suppliers in the market
5. There are thought to be no hindrances to passage & passageway of firms in long run which
implies that the market is interested in rivalry from new suppliers this influences the long run
benefits made by each one firm in the business.
6. No externalities in generation and utilization so that there is no dissimilarity in the middle of
private and social expenses

Short run price and output for the competitive industry and firm:
In the short run the equilibrium market price is controlled by the collaboration between market
demand and market supply. In the chart demonstrated above, price P1 is the market-clearing
price and this price is then taken by each of the organizations. Since the market price is steady
for every unit sold, the AR curve likewise turns into the Marginal Revenue curve (MR). A firm
amplifies profits when minimal income = peripheral cost. In the outline over, the profitmaximizing output is Q1. The firm offers Q1 at price P1. The region shaded is the financial (
super normal profit) made in the short run in light of the fact that the decision market price P1 is
more noteworthy than average total cost.

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Not all organizations make super normal profits in the short run. Their profits rely on upon the
position of their short run cost curves. A few firms may be encountering sub-normal profits in
light of the fact that their average total costs surpass the current market price. Different firms
may be making normal profits where total income equivalents total cost (i.e. they are at the earn
back the original investment output). In the chart beneath, the firm demonstrated has high short
run costs such that the decision market price is underneath the ATC curve. At the profit
maximizing level of product, the firm is making a financial misfortune (or sub-normal profits)

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The Effects of a change in Market Demand:

In the diagram underneath there has been an increment in market demand (ceteris paribus). This
causes an increment in market price and amount exchanged. The association's average income
curve movements up to Ar2 (=mr2) and the profit maximizing output stretches to Q2. Perceive
that the MC curve is the association's supply curve. Higher prices cause an extension along the
supply curve. Taking after the increment in demand, total profits have expanded. An internal
movement in market demand would have the inverse impact. Consider the impact of a change in
market supply - maybe emerging from a cost-diminishing mechanical advancement accessible to
all organizations in a focused market.

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Benefits of perfectly competitive market structure:

optimal portion of assets

competition empowers effectiveness
consumers charged a lower price
responsive to purchaser wishes: Change in demand, heads additional supply
They allot assets in the most effective way- both gainfully (P=mc) and allocatively
productive (P> MC) over the long haul.
there is no data disappointment as all information is spread out equally
only normal profits made simply take care of their chance expense
maximum buyer surplus and monetary welfare
Because there is impeccable learning, there is no data disappointment and information is
imparted equitably between all members.
There are no hindrances to entrance, so existing firms can't infer any syndication power.
Only normal profits made, so makers simply take care of their chance expense.
There is no compelling reason to use cash on promoting, in light of the fact that there is
impeccable learning and firms can offer whatever they can deliver. What's more, offering
unbranded merchandise makes it hard to develop a successful publicizing crusade.
there is greatest conceivable:
consumer surplus
economic welfare
there is greatest allocatively and beneficial effectiveness:
Equilibrium will happen where P = MC, thus designate effectiveness.
In the long run equilibrium will happen at output where MC = ATC, which is profitable
effectiveness.
there is likewise most ex

4.1 Profit maximizing or loss minimizing rule in the context of

perfectly competitive market:
Perfect Competition, Loss Minimization or Profit Maximization:
A perfectly competitive firm is ventured to create the amount of yield that minimizes monetary
losses, if price is more noteworthy than average variable cost however short of what average
aggregate cost. This is one of three short-run generation choices confronting a firm. The other
two are profit maximization (if price surpasses average aggregate cost) and shutdown (if price is
short of what average variable cost).

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A perfectly competitive firm guided by the quest for profit is slanted to create the amount of
yield that likens marginal revenue and marginal in the short run, regardless of the fact that it is
acquiring a monetary loss. The way to this loss minimization creation choice is a correlation of
the loss brought about from creating with the loss acquired from not delivering. On the off
chance that price surpasses average variable cost, then the firm brings about a more diminutive
loss by delivering than by not creating.

One of Three Alternatives:

Loss minimization is one of three creation choices confronting a perfectly competitive firm. Each
of the three are shown in the table to the right. The other two are profit and shutdown.
With profit maximization, price surpasses average aggregate cost at the amount that
likens marginal revenue and marginal cost. For this situation, the firm creates a monetary
profit.
With shutdown, price is short of what average variable cost at the amount that compares
marginal revenue and marginal cost. For this situation, the firm brings about a littler loss
by creating no yield and acquiring a loss equivalent to aggregate altered cost.

Alternative production
Cost and price

Consequence

P > ATC

Profit Maximization

ATC >
AVC
P < AVC

>

Loss Minimization

Shutdown

Profit Maximization Rule:

Profit is maximized where
Profit maximization standard: Produce until the point where the change in revenue from creating
1 more unit equivalents the change in cost from delivering 1 more units.

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Why?
Assume MR > MC. In the event that I deliver 1 more unit, my revenues increment by more than
my costs. Hence, if MR > MC, creating increasingly will build my profit. On the off chance that
I can expand my profit by changing the extent to which I create, then when creating where MR >
MC can't be profit-amplifying.
Assume MR < MC. In the event that I deliver 1 less unit, my revenues diminish by short of what
my costs diminish. Consequently, if MR < MC, I can build profit by diminishing yield. On the
off chance that I can expand profit when MR < MC, then picking q such that MR < MC cannot
be profit-maximized.
In this way, to boost maximized, I must pick an amount q such that MR = MC.
MR = MC is a harmony as in it is the main spot where there is no motivation to change the
creation level.
This control, the profit maximization guideline, is simply an application of the marginal rule
(MB = MC).
Why? This MB of delivering an additional unit is the additional revenue you get. MR is the MB.
So the 2 announcements are proportionate. The marginal rule is more general, and the profit
maximization standard is particular to the firm creation choice.

4.2 Profit maximizing or loss minimization rule in the context of

economic profit, normal profit, and economic loss:
Profit maximization occurs in the context of perfectly competitive market where the marginal
revenue equals the marginal cost. A company marginal cost suppose 10000 dollar and the
marginal revenue suppose also 10000 then the profit maximization can occur. The profit
maximization creates the economic profit or the super normal profit, normal profit and the
economic loss in the context of perfectly competitive market as well as the monopolistic market
situation. The economic profit, normal profit and the economic loss are discussed in the
following section in the context of perfectly competitive market situation.

Normal profit:
The normal profit under the profit maximization in the context of perfectly completive market
occurs when the profit of an organization equals to the average cost. The condition of normal
profit can be given in the following formula.
Profit (P) = Average Cost (AC)
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In the long period, economic profit can't be managed. The landing of new firms or development
of existing firms (if comes back to scale are steady) in the business sector causes the (flat)
demand curve of every individual firm to movement descending, cutting down in the meantime
the price, the normal revenue and marginal revenue curve. The last result is that, over the long
haul, the firm will make just ordinary profit (zero economic profit).

MC

AC

C0
P0

Figure: Normal Profit

Y0

MR

AR

Here P0 is the market setting price. At OP0 price total output OY0. So total revenue = OP0 *OY0=
OP0C0 OY0
Average cost of producing per unit output is OP0. So total cost = OP0 * OY0 = OP0C0 OY0
Profit (R) = Total revenue Total Cost
= OP0C0 OY0 - OP0C0 OY0
This is the normal profit under the profit maximization in the context of perfectly competitive
market situation.

Economic Profit:
The Economic profit under the profit maximization in the context of perfectly completive market
occurs when the profit of an organization greater than the average cost. The condition of normal
profit can be given in the following formula.

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Profit (P)>Average Cost (AC)

Super normal profit is characterized as additional profit over that level of normal profit. Super
normal profit happens where AR>ATC. Super normal profit is otherwise called abnormal profit.
Abnormal profit implies there is an impetus for different firms to enter the business (in the event
that they can)

MC

AC

C0
P0

P0

C0
Figure: Economic
profit

Y0

MR

AR

Here OP0 is the market setting price and OP is the average cost of producing per unit output.
Total profit= Total revenue Total cost
P0P0C0C0 = OP0C0Y0 OP0C0Y0
In this figure P0> AC so firm or industry make economic profit.

Economic loss:
The Economic loss under the profit maximization in the context of perfectly completive market
occurs when the profit of an organization less than the average cost. The condition of normal
profit can be given in the following formula.
Profit (P) <Average Cost (AC)

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On the off chance that organizations in an industry are encountering economic losses, some will
clear out. The supply curve moves to the left, expanding price and decreasing losses. Firms keep
on leaing until the remaining firms are no longer enduring lossesuntil economic profits are
zero.
Before inspecting the instrument through which entrance and passageway take out economic
profits and losses, we should inspect a vital key to comprehension it: the contrast between the
bookkeeping and economic ideas of profit and misfortune.

MC

AC

C0
P0
C0
P0

C0

E
Figure: Economic Loss

Y0

MR

AR

Here market price is OP0 less than average cost OP0 of produced output. Total revenue OP0C0Y0
and total cost is OP0C0Y0. So the economy loss is P0P0C0C0.
When the market structure is monopoly then shut down may occurred in the time of economic
loss but in the perfect competitive shutdown create loss in short run but no loss in long run.

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Conclusion:
The market structure of a country of any industry changes over time. In the initial level of an
industry, there are only few firms to dominate the firm and get more advantage and set price in
their own way. Because they know that there is no possible alternative of them. In the south
African telecom sectors the MTN or Vodacom initially set their price in their own way to make
more profit from the competitors. But when some others firms like Virgin enter into the market
become the market more competitive than before to set competitive prices.

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