Perfect competition vs monopolies

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  • PERFECT COMPETITION vs MONOPOLIES
    • MONOPOLIES
      • CHARACTERISTICS
        • Firms are price makers
          • Firms set their own prices.
        • High barriers to entry and exit.
        • Firms can gain abnormal profit in the long run as there are no competing firms in the market.
      • WHY MONOPOLIES ARE MORE DESIRABLE
        • ABNORMAL PROFIT in the long run can go towards research and development.
        • Monopolies produce more than any single firm would in a perfectly competitive market. 
          • this may lead to Economies of scale and so lead to lower average cost.
        • HOWEVER
          • They're seen to also be productively inefficient as they do not produce at the lowest point on the average cost curves.
          • They are seen to be allocatively inefficient as they set their prices higher than marginal prices.
          • Consumer welfare is lost.
          • They are seen to be uncompetitive due to high barriers to entry.
          • No incentive to lower their costs because of no competition  so they are X inefficient.
            • X efficiency means the gap between the actual and lowest possible costs.
  • Large number of buyers and sellers
  • CHARACTERISTICS
    • Large number of buyers and sellers
    • Homogeneous
      • All  products are same.
    • Firms are price takers
      • This means that the firm has to accept the price ruling in the market.
    • Large number of firms

Comments

davidsalter

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This is an excellent graphical depiction of the differences between perfect competition and monopolies. Students can add to it by linking the contrasting aspects of each.

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