Monopoly vs Perfect Competition

Topics: Economics, Microeconomics, Perfect competition Pages: 2 (792 words) Published: December 8, 2012
The ongoing debate about efficiency in perfect competition and monopoly has had divided outcomes. At a first glance it may be easy to say that perfect competition is more efficient than monopoly, and thus better for society. But on closer examination, the issue is not as clear cut. There are underlying issues with the assumptions of the perfectly competitive model, as well as the ambiguous concept of x-inefficiency in a monopoly amongst other issues. Adam Smith refers to monopoly as a "...great enemy to good management", and to competition as the medium for " divisions of labour, and new improvements of art, which never otherwise would have been thought of". In this essay I will first outline the assumptions of each model and then proceed to analyse and compare their efficiency levels, coming to a conclusion as to weather a monopoly is necessarily less efficient than a perfectly competitive market. Perfect competition

The underlying theory of competition starts by assuming perfect competition in the goods market. This involves infinite buyers and infinite sellers, each with perfect information regarding costs, profits and demand, freedom of entry and exit and all selling a homogeneous good. The factor market is also perfectly competitive, which means the marginal productivities of both capital and labour are known, and all factor contracts are complete. In both spheres agents are profit and utility maximisers subject to constraints (budget, leisure, ability cost and technology). Given that these conditions are fulfilled in all markets consumer welfare is maximised, the economy is in Pareto equilibrium. Economic resources are allocated in the precise way consumers wish, wishes being reflected by the price system. As well as allocative efficiency, perfect competition leads to productive efficiency, minimum average cost production, since above minimum average cost selling would mean zero sales. If a firm is less efficient than other firms it...
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