Monopoly PC Evaluation

Revision notes on monopolies and perfectly competitive markets for AQA A-Level Economics Paper 5.

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James
MARKET STRUCTURE ­ EVALUATING PERFECT
COMPETITION AND MONOPOLY
PROFIT MAXIMISATION ­ PERFECT COMPETITION & MONOPOLY
A perfectly competitive market is productively efficient, because it is
trying to produce at the lowest cost ­ hence this is a true at the
bottom of the AC curve. The profit maximising rule of equating MC
with MR is applied if the firm is to avoid making a loss; this coincides
with the lowest point on the AC curve.
Also, such a market is allocatively efficient because P=MC. Hence
there is no overproduction or underproduction; everyone who wants
that good, gets that good.
Price takers (Perfectly Competitive): Have to accept the market
price.
Price Makers (Monopolies): Firms can influence the price.
EFFICIENCY AND ECONOMIC WELFARE
Static Efficiency
Allocative: In the short run, if a firm is more productively efficient
then supernormal profits will form. In the long term other firms will
innovate & change resulting in more supply and thus the price will fall.
Productive: Where Price = Marginal Cost and consumer sovereignty. In the long run, perfect
competition will force businesses to change production in line with consumer demands. If
they fail to respond then they will go out of business.
Dynamic Efficiency
Measures productive efficiency over a period of time. E.g. Innovation and R&D.
DYANMICALLY EFFICIENT
M + Economies of Scale = More money. No incentive to innovate due to a lack of
o + Can afford to meet health & safety competition and no incentive to cut
n regulations and technology. costs.
o
p
o
l
y
P + Only way to earn abnormal profits in "Free rider" problem `Perfect
the short run is to innovate Information'.
C Incentive to lower the AC curve. Cannot afford to innovate ­ can only
o earn abnormal profit in the short run.
m
p
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James
Consumer Surplus: The difference between the value to buyers of a level of consumption of a
good, and the amount that buyers actually pay for that amount.
Perfect Competition (good) Monopoly (bad)
Allocative Efficiency Allocative Efficiency
P=MC. A firm must produce what Monopolies have an incentive to cut
consumers want otherwise they will go production and artificially raise prices. P
out of business. > MC; the product is under produced.…read more

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James
Conditions: (1) Monopolist faces different demand curves from separate buyers. (2) The
monopolist must be able to split the market into distinct groups of buyers. (3) The monopolist
must be able to keep the markets separate at a relatively low cost.…read more

Comments

davidsalter

This is an excellent 2 page summary comparing monopoly and perfect competition. It is well laid out.

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