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

Report

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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