Monopoly vs Perfect Competition

Topics: Perfect competition, Economics, Supply and demand Pages: 3 (518 words) Published: November 10, 2010
Monopoly is a situation in which a single company owns all or nearly all of the market for a given type of product or service. In such an industry structure, the producer will often produce a volume that is less than the amount which would maximize social welfare.

On the other hand . Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. It meets the following criteria - all firms are price-takers, all firms have a relatively small market share, buyers know the nature of the product being sold and the prices charged by each firm, there is a complete freedom of entry and exit.

While monopoly and perfect competition mark the extremes of market structures there are many point of similarity. The cost functions and shutdown decisions are the same. Both firms aim at maximizing profit.

But there are many differences among the two:-

1. Price - In a perfectly competitive market price equals marginal cost. In a monopolistic market price is greater than marginal cost.

2. Product differentiation: There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute. With a monopoly there is high to absolute product differentiation in the sense that there is no available substitute for a monopolized good.

3. Marginal revenue and price - In perfectly competitive market marginal revenue equals price. In a monopolistic market marginal revenue is less than price.

4. Supply Curve - In a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists

5. Number of competitors: PC markets are populated by an infinite number of buyers and sellers with possibility of free entry and exit. Monopoly involves a single seller.

6. Market Power: Perfectly...
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