Main differences between perfect competition and monopoly market structures - Essay Example

Additionally, the firms already in perfect competition have no way of exploiting customers, because other firms can entre and compete with them. Furthermore, firms in this market structure have good price information because buyers or consumers have to know the prices so that they can compare with other firms before they buy a product. On the other hand, suppliers have to know the prices so that they can merge them with others (OConnor 2004). Based on the above analysis of firms in perfect competition, the following assumptions can be deduced from the firms.

The firms offer homogenous products meaning that products are differentiated in terms of packaging or branding so as to beat competition and stay in business. Buyers and sellers in this market are many, and this means that exit of seller in the market has no effect on the prices. This further indicates that both buyers and sellers have no influence on price hence price is determined by market (Chakra arty 2009). Firms under perfect competition have no influence on the price therefore they are the price takers.

Because of existence of many firms in the market each firm charges the price determined by the demand and market supply. In the short-run, firms under perfect competition make supernormal profits or loss. Because of no barriers to entry or exit from market structures under perfect competition, other firms join into the market and if they make losses, firms making losses exit the market. In the long run, due to the many firms that have joined the market influenced by super-normal profits made by other firms, the supply in the market will be more hence supply curve shifts to the right to the point where super-normal profits are no more (Khanna, 2008).

Additionally, in the long run supply has more influence on the price than the demand. The first graph represents market of many suppliers and many