First 341 words of the document:
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 Makers (Monopolies): Firms can influence the price.
EFFICIENCY AND ECONOMIC WELFARE
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.
Measures productive efficiency over a period of time. E.g. Innovation and R&D.
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.
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.
Other pages in this set
Here's a taster:
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
Here's a taster:
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