Essay, Pages 3 (726 words)
A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the firm on its own is the industry. Perfect competition is a market structure in which all firms sell an identical product, all firms are price takers, they cannot control the market price of their product, firms have a relatively small market share, buyers have complete information about the product being sold and the prices charged by each firm, and finally the there’s a free entry and exit of firms.
In this essay, I will attempt to compare face to face this two market structures, monopoly versus perfect competition.
To begin with, in a perfect competition, there are no barriers to enter or exit the industry. This means, anyone can establish a firm, and start producing and selling their own products, and likewise could leave the market if they wanted to. However, in a monopoly, new firms are almost impossible to emerge because they face many obstacles so it is difficult for them to introduce their products to the existing market.
The problems they could face are called barriers to entry.
The barriers could be natural barriers to entry, which occurs when large firms (monopolies in this case)are more efficient than being small, or it could be artificial barriers to entry, which are those created by a powerful monopoly purposefully to restrict competition. In a perfect competition, no one firm or consumer will have any power to influence the market price of a product.
If a firm did try to increase the price of the product above the market price to increase their profits, they would be lose customers to rival producers and soon go out of business. Therefore, they are all known as price takers.
However, since a pure monopoly controls the total supply of the whole industry, they may use this power to restrict market supply to force up the market price and earn excess profits, also known as abnormal profits. Therefore, a monopoly is a price maker. This demand and supply curve shows the impact of monopoly restricting market supply on the price, resulting in abnormal profits. This shows it is a price maker. The demand curve for the individual firm is perfectly elastic, which reflects how the firm is a price taker. In a perfect competition, the consumer is priority. The products supplied depend on the consumer’s wishes. For instance, if many different firms are producing product
X, but suddenly there’s a decrease in demand for that product, there would be an excess supply. Therefore, they start producing product Y, which raises the demand again. This will result in no more surplus or scarcity. However, the response to consumer wishes might be slow, not resulting in a wise allocation of resources. On the other hand, a monopoly supplies only the good or service they want to and don’t depend on consumer’s demand since there is no consumer choice. It could even lower product quality and increase their prices to decrease the costs and increase their profits, and there would still be no change to the demand.
Moreover, in a monopoly, the firm has the option to be more efficient by buying new technology or introducing innovations since they have enough resource, such as capital, to do so. For instance, a monopoly can innovate a whole new process of production for the product, through research, and make it much more efficient. The firm reduces the cost of production and gains more profit, and resources are optimized. Therefore, the basic economic problem may find a solution. However, at the same time, because of the lack of competition and the firm earning abnormal profits in a monopoly, it may make less effort to use resources efficiently than it would in presence of competition.
This is called x-inefficiency. Clearly, a monopoly has the option to be efficient through innovation and technology or to be inefficient because of lack competition and no motivation to be so. However, in a perfect competition, the firms don’t have the choice to be efficient since all of the firms, their processes and their products are identical. Many small firms producing the same good or offering the same service and all of them using the same resources to do so isn’t efficient because they’re wasting resources in the production of one single product.