Perfect Competition and Monopoly - Essay Example

?Introduction: According to Thomas Sowell, “The first lesson of economics is scar There is never enough of anything to satisfy all those who want it.” (Harman, 2009) Thomas Sowell is correct in his disposition that there are limited resources and unlimited demands of human beings living on this earth. One needs to find a trade off to maximize his utility. Besides that, there are several hindrances which force him to make rational decisions while apportioning resources effectively. This principle segregates market into two extreme continuums of market structure which are Monopoly and perfectly competition. These structures leave one benefitted and other worsen off. Economist offer infer that perfect competition is the right way to progress in the long run as it bring efficiency in the market however; detailed discussion and comparison is essential to reach a conclusion. (Baumol & Blinder, 2011) They can be compared on the following four characteristics. No. of firms Monopoly is an industry which is comprised of a single firm who is undeniably the price maker with extensive control over the market. He is known to maximize profit through controlling output in the market. He will increase the output only if his marginal revenue is greater than its marginal cost, which will ultimately result in maximization of profits. Utility service providers are a perfect example of monopoly. In contrast, perfect competition is an industry comprised of large number of small firms, each with absolutely no control over price. They are the price takers and follow price set by the demand and supply principles. For instance, soybeans market in California is an example of perfect competition as there are many buyers and sellers and price is set where demand and supply meets. Available Substitutes: A monopoly firm produces a unique product which has no close substitutes. Monopoly being the sole producer of the product can control the market and influence price through this characteristic. There is hardly any other company providing railway services then one in county. This gives the company a monopoly power as no close substitute is available. In contrast, a perfectly competitive industry produces identical products with limited or no differentiation in products. This industry has infinite number of substitutes which are readily available in the market. This characteristic does not allow perfectly competitive firms to charge higher than the market price. Resource Mobility: Monopoly structure contains strong barriers to entry which is the prime reason for monopolies to exist. . Adding up, there are four primary advantages that allow the monopoly firm to enjoy power and restrict the other firms to enter the market. These are economies of scale, economies of slope, cost complementary and patents. This restricts any other player to enter the market even if abnormal profits are on offer. Pharmaceutical firms pay large sum of money to buy patents which restricts other manufacturers to enter the market. In contrast, perfectly competitive firms have absolute freedom to enter or exit the industry. There are no barriers for them which does not all this structure to enjoy abnormal profits as companies enter to reap profits when they notice a probability of such a scenario. If this scenario occurs, then firms will enter the market to reap those profits which will shift the supply curve to right as shown in the graph below. The supply curve shifts from S0 to S1 which will reduce the market price from P0 to P1 that would eventually result in dipping profits. On the other hand, if the firm in short run incurs losses, it will leave the industry and force the supply curve to left or upward from S0 to S2 , which will increase market price from P0 to P2 and hence; the firm that remain in industry will enjoy increased profits (Lambert M. Surhone, 2010). This fluctuation will remain until average cost of product is equal to market price. S1 S0 P MC S2 AC Pe Pe = MR = MC Information: In a monopoly, the information obtained by the company is usually kept secretive. Other firms are unaware of the processes of manufacturing the product. On the other hand, in a perfectly competitive market, the information is easily available to all. Every manufacturer possesses the same information about price and production techniques which makes differentiation restricted. The aforementioned points discriminate both poles from each other. The above difference introduces certain consequences which will help us discover the effect on price and cost structures of both the extremes. Consequences: First and the foremost is the demand curve for monopoly. The market demand curve is the same as of firm demand curve. It is downward sloping which is in accordance to the principles. On the other hand, the demand curve for a perfectly competitive firm is perfectly elastic. This is the sole reason for firms being a price taker. They cannot sell their product at a higher price as all players in the market possess same information. P MC Pm AR Profit ATC (Qm) DC Secondly, the monopoly firm can charge a higher price by producing less output which pushes the price upward. Their price does not equal to marginal cost which leads to a conclusion that they are not utilizing their resources effectively. Their cost of producing is significantly low. On the contrary, perfect competition is known for highly effective and efficient use of resources. The competition forces them to use their resources efficiently so that they could reduce their cost. Thirdly, monopoly firm usually receives a guaranteed economic profit as it can push price up and down by controlling the output. On the other hand, perfectly competitive firm is never guaranteed to earn economic profit as they barely manage to gain normal profit in the long run. Lastly, a prominent difference between the marginal cost curves is that for a perfectly competitive firm’s positively sloped marginal cost curve is their supply curve. This also infers that their supply curve is also positively sloped. On the contrary, monopoly’s marginal cost curve is not their supply curve. There is no positively-sloped curve for a market controlled by a monopoly. Their output depends on the price. They may produce a larger quantity if the price rises and may reduce supply if the price falls. For instance, pharmaceutical firms often sell a large quantity to reduce cost as they face decreasing average cost due to economies of scale. Conclusion: The aforementioned points have leaded us to end our discussion on the points that perfect competition pays off in the long run. It is not only beneficial for the market but for the society as well. It promotes efficiency in the market and utilizes resources in an effective manner. Moreover, monopoly firms cannot increase the price to a level they want as they too suffer from a downward sloping demand curve and that resists the drive towards price inflation. In a nutshell, both these structures have their positive and negatives and it is up to the reader to decide which structure will pay off in the long run. Works Cited Baumol, W.J. & Blinder, A.S., 2011. Economics: Principles and Policy. Cengage Learning. Beccary, 2009. Perfect Competition Market. [Online] Available at: HYPERLINK "http://perfectcompetitionm.wordpress.com/category/uncategorized/" http://perfectcompetitionm.wordpress.com/category/uncategorized/ [Accessed November 2011]. Fitzgerald, R., 1988. When government goes private: successful alternatives to public services. Universe Books. Harman, J., 2009. The green crunch: Why we need a new economics for Britain's environmental challenge. Fabian Society. Lambert M. Surhone, M.T.T.S.F.M., 2010. Perfect Competition: Neoclassical Economics, Microeconomics, Factor, Marginal Cost, General Equilibrium Theory, Marginal Revenue Productivity Theory of Wages. Betascript Publishers. McConnell, C.R. & Brue, S.L., 2007. Economics: principles, problems, and policies. McGraw-Hill Irwin. Read More