Last Updated 25 Dec 2020

The larger the number of firms in a monopolistic competition situation

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This is possible because a monopolistic market favours the company to the detriment of the consumer. The traits of a monopoly are high price levels, supply constraints, or excessive barriers to entry. This type of market would be comprised of one supplying firm and consumers would have no choice but to purchase solely from this firm.

The larger the number of firms in a monopolistic competition situation, the larger are that country’s exports. This is incorrect as in monopolistic trade there is only one firm and the  monopoly firm’s demand curve is identical to the market demand curve, and the monopoly firm need not consider what it’s competitors are pricing at. The moment another firm enters the trade it is no longer a monopoly. Two countries engaged in trade in products with no scale economies, produced under conditions of perfect competition, are likely to be engaged in intra-industry trade.

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This is possible as any country which can find comparable goods at a better price will take to import of that product. However, generally these are influenced by technological and or human factors. International trade generally takes into account cost and utility, in determining trade. History and accident determine the details of trade involving scale economies.

This is untrue as what determines scale of economies is cost advantages that a business obtains due to expansion. Economies of scale are utilized by any firm expanding its scale of operation. These are not by accident and are planned. However, historical reasons may play a part in trade between two countries and the scale of economies, but even this has decreased with modern trade practices. Intra-industry trade will tend to dominate trade flows when the following exists: Large differences between relative country factor availabilities.

 This is true as trade takes place to fulfill one reason – demand. When there is a large difference between two countries on availability and/or price, it naturally spurs demand, and depending on the factors available, Intra industry trade will develop. The rising share of intra-industry trade may grow due to increase of technological transactions and also due to expansion of the intra-firm network through foreign direct investment.

A tariff always drives a wedge between foreign and domestic prices, raising the domestic price but by less than the tariff rate. True, because when a country implements a tariff, it will create an increase in the price of the goods on the domestic market, and a decrease in price in the rest of the world. If we add together the gains and losses from a tariff, we find the net effect on national welfare can be separated into three parts.

This is true as the aggregate welfare effect for the country is found by summing the gains and losses to consumers, producers and the government. The net effect consists of three components – positive terms of trade effect, a negative production distortion and a negative consumption distortion. An export subsidy causes the same losses as a tariff.

The welfare effects of a tariff and an export subsidy are quite different in a competitive market. The subsidy raises the internal prices at home, while lowering the price abroad. The difference between a tariff and an export subsidy is that former improves the terms of trade while the latter worsens them. The extent of loss or gain will vary on factors employed.

The larger the number of firms in a monopolistic competition situation essay

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