Explain, and illustrate using graphs, whether you think a perfectly competitive industry or a monopoly industry leads to more efficient outcomes for an economy. RESEARCH ESSAY
Microeconomics is defined as a study of how economic decisions are made by individuals and groups along with the range of factors affecting those decisions. In relevance to this, the analysis of perfect competition and monopoly regarding efficiency is considered one of the most core basis to the understanding of Microeconomics. This paper argues that a perfectly competitive industry leads to more efficient outcomes for an economy than a monopoly does. In this essay, I will first define the concept of two market structure types and then go on to explore how they affect the level of efficiency and economic welfare. Alternatively, I will also bring up some exceptions by which this finding may not be as correct as thought. The first section of this paper will briefly introduce the two main types of market structure. Perfect competition is a market that satisfies the conditions of having many buyers and sellers, firms selling identical products, having zero barriers to entry and having perfect information. A perfectly competitive firm is a price taker as it has no power of affecting the market price. In reality, perfect competition is only a theoretical model and it does not really exist in real-world market (Makowski 2001, 480; Ziebarth 2008, 3 and Pettinger N.Y, sec. 2) although there are some markets that can get slightly close to the previously discussed characteristics such as markets for organic food and currency markets. Despite this, perfect competition is still used as a benchmark since it displays high level of economic efficiency (Riley 2006, sec. 11, par. 1). With the second market structure, a firm is considered as a monopoly only when there is one seller providing certain goods or services with no close substitute and it can ignore other firms’ actions as it is a price maker. (Hubbard, Garnett, Lewis and O’Brien 2010, 224). In regards to the illustration of which industry leads to more efficient outcomes, the following discussion will consist two main parts which represent for the two ways economists use to evaluate perfect competition and monopoly. The first part relates to individual firms in terms of efficiency concept. The second part involves the industries and the level of economic welfare contributed to the entire society. Taking the first part in account, the three concepts of efficiency are of great importance. There are three types of efficiency: allocative, technical and dynamic efficiency. With allocative efficiency, products are produced up to the point where price, or marginal benefit, equals marginal cost of producing an extra unit. Technical efficiency refers to the act of producing a level of outputs using the least amount of resources. Dynamic efficiency is about the adoption of new technology over time to improve production techniques and meet the changing consumer demands (Lewis, Garnett, Treadgold and Hawtrey 2010, 94). Below are the two graphs showing firms’ efficiency in providing goods and services in long-run: Perfect competition
The left graph shows the long-run equilibrium of firms in perfect competition. According to this diagram, firms actually earn a zero economic profit since they have to accept the price determined by the whole industry. Thus, their MR curve is the same as their D curve which means they will produce at the output level Q where they can only cover the ATC. Thus, firms are seen as achieving both allocative and technical efficiency. They are allocatively efficient because they will produce up the point where price equals MC of producing an extra unit due to high level of competitors leaving and entering the market in short-run. Furthermore, the firms must minimize their production cost because of zero economic profit. In other words, if they fail to produce at the lowest point...
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