Perfect Competition and Monopoly
What is Perfect Competition?
Perfect Competition is a market structure characterized by a large number of small firms, homogeneous products, free entry and exit, perfect information, and no control over prices by individual firms.
How are prices determined in a perfectly competitive market?
Prices are determined by the forces of supply and demand. Individual firms accept the market price as given.
What happens to profits in the long run in perfect competition?
In the long run, firms earn only normal profits (zero economic profit). Any economic profits attract new firms, increasing supply and driving prices down until only normal profits remain.
Why is perfect competition considered efficient?
Perfect competition leads to allocative and productive efficiency. Resources are allocated to their most valued uses, and goods are produced at the lowest possible cost.
What is a monopoly?
A monopoly is a market structure where a single firm is the sole producer and supplier of a product or service with no close substitutes, allowing significant control over prices.
How does a monopolist set prices?
A monopolist sets prices by choosing the output level where marginal revenue equals marginal cost (MR = MC). This typically results in higher prices and lower output than in competitive markets.
What are barriers to entry in a monopoly market?
Barriers to entry can include legal restrictions (patents, licenses), high startup costs, control over key resources, and technological advantages.
What is price discrimination in a monopoly?
Price discrimination occurs when a monopolist charges different prices to different consumers for the same product based on their willingness to pay, thereby increasing profits.
Are monopolies efficient?
Monopolies are generally less efficient than competitive markets. They can lead to allocative inefficiency (misallocation of resources) and productive inefficiency (higher production costs).
Difference between Perfect Competition and Monopoly
The number and types of firms operating in an industry and the nature and degree of competition in the market for the goods and services is known as Market Structure. To study and analyze the nature of different forms of market and issues faced by them while buying and selling goods and services, economists have classified the market in different ways. The different forms of market structure are Perfect Competition and Imperfect Competition (Monopoly, Monopolistic Competition, and Oligopoly).