Monopoly vs perfect competition

Essay by billthanC, October 2014

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Economics 20143889

Theoretically, monopoly market has numerous buyers but only one producer which hold a very high barrier to entry such as start-up cost or copyright to prevent the new competition to join the market. This leads to imperfect knowledge in the market and help the monopoly firm has the power to be a price setter. The products which are produced in this type of market are highly differentiated. On the other hand, perfectly competitive market has a large number of firms and customers there is not any barrier to entry thus new competitions can join the market easily. The assumption in this market is that all the firms and buyers have perfect knowledge about the products. This lead to the fact that the goods in this market are homogeneous. Therefore, they are price taker (John Sloman 2012). In this essay, we will look at the similarities and differences of firms in these two market.

In the long run, monopoly firm will be able to make supernormal profit while firm in perfectly competitive market only can make normal profit. This is because of the difference in the degree of barrier to entry and exit in each market. As shown in diagram 1, as the only firm in the market, monopoly firm will have the market power to set the output at the profit maximising output level where marginal cost of producing one extra unit of good is equal to the marginal revenue of that good ( MC = MR). Thus the price (P) is higher than the average cost of production (C), hence, they will have a supernormal profit which is represented by area ABCP. Monopoly firm will be able to maintain this economic profit as they have a very barrier to entry. Thus, it is nearly impossible for new...