To What Extent Is a Perfect Competition Market Structure Always More Efficient Than Monopoly?

Topics: Economics, Monopoly, Perfect competition Pages: 3 (1155 words) Published: March 8, 2013
To what extent is a Perfect Competition market structure always more efficient than Monopoly? A perfect competitive market is a market in which no participants are large enough to have the market power to set the price of a homogeneous product. Other assumptions of Perfect Competition are Perfect Knowledge, a large number of small firms, freedom to entry and exit the market and profit maximization. Due to these assumptions the firms are price takers, which means they need to accept the price that the market sets them. The level of profit maximization in a perfectly competitive market is reached, where marginal cost equals marginal revenue, but firstly the firm starts to produce in equilibrium at Q and P. In favor of their aim to reach a level, where profits are maximized, they are producing at the profit maximizing level of output (MC=MR). In that way the firms are able to make abnormal profits in the Short Run. Even though they are only allocatively (MC= MR), but not productively efficient, because output will not occur, where marginal cost is equal to average cost. As the firm makes abnormal profits more and more firms will start to enter this market, because they are incented by the abnormal profits. At some point this will lead to an excess supply (S1 shifts to S2) and abnormal profits will be competed away, (because as Supply increases Price and Profits are going to fall).So in the Long Run firms are only able to make normal profits (TR =TC), but they are allocatively and productively efficient. In contrast, a pure Monopoly is defined as a single seller of a product, i.e. a firm that produces a 100% of the market output. Further assumptions of a monopoly are that the seller produces branded goods, creates barriers to entry and maximizes profits. As in a monopoly the firm is the market at the same time, the firm’s revenue curve is shown as downward sloping. Generally it is the assumption that there are barriers to entry that gives the monopoly its market...
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