Monopolistic Competition Vs Perfect Competition Essays

Monopoly Vs Perfect Competition Essay

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 competition to join the market and the supply curve in the market will not be affected. Thus the price will always be set at the profit maximising output level.

Diagram 1

Similar to monopoly firm, firms in perfectly competitive market will also try to set output at the profit maximising output level. Thus in the short run they may be able to experience supernormal profit which is shown by area ABCP (diagram 2). However, In the long run, they will only able to have a normal profit. This is due to the low barrier to entry in this market. As firms are enjoying supernormal profit in short run, over the time, new competitions will join the market as they see the opportunity to market profit from the market. Thus this will lead to a raise in number of seller which will increase the supply in the market. This is represented as a rightward shift in the supply curve from S1 to S2. As shown in diagram 2, the price of good will fall from P1 to P2, and this also lead to a decrease in profit for the firm. The supply curve will keep increase until the point where price of the good is only equal to...

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A monopolistic market and a perfectly competitive market are two market structures that have several key distinctions, such as market share, price control and barriers to entry. In a monopoly, there is only one firm that dictates the price and supply levels of goods and services and has total market control. Contrary to a monopolistic market, a perfectly competitive market is comprised of many firms, where no one firm has market control.

Monopolistic Market

In a monopolistic market, prices are generally high for goods and services because firms have total control of the market. In this type of market, firms are price makers because they control the prices of goods and services. Firms have total market share, which creates difficult entry and exit points. Since barriers to entry in a monopolistic market are high, firms able to enter the market are still often dominated by one bigger firm. A monopolistic market generally involves a single seller, and buyers do not have a choice of where to purchase their goods or services.

Perfect Competition

In a market that experiences perfect competition, prices are dictated by supply and demand. Firms in a perfectly competitive market are all price takers because no one firm has total market control. Unlike a monopolistic market, firms in a perfectly competitive market have a small market share. Barriers to entry are relatively low and allow firms to enter and exit easily. Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers are able to choose where they buy their goods and services.

Monopolistic Competition

In between a monopolistic market and perfect competition lies monopolistic competition. In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control, whereas a monopolist in a monopolistic market has total control of the market. Unlike a monopolistic market, monopolistic competition offers very few barriers to entry. All firms are able to enter into a market if they feel the profits are attractive enough. This makes monopolistic competition similar to perfect competition.

However, in a monopolistically competitive market, there is product differentiation. Products in monopolistic competition are close substitutes; the products have distinct features, such as branding or quality. This is unlike both a monopolistic market, where there are no substitutes for products, and perfect competition, where the products are identical. Pricing in perfect competition is based on supply demand, while pricing in monopolistic competition is set by the seller.

(For related reading, see: A History of U.S. Monopolies.)

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