Perfectly Competitive Firms Versus Monopolies: Inability to Make Enormous Profits - Essay Example

Stated otherwise, these competitive companies make profits that would only be enough to pay for the overhead costs, the day-to-day operations, other immediate or emergency purchases to keep the business going, and enough cash on hand. The resulting net would be a thin margin of profit. On the other hand, companies that have monopoly over a particular industry earn huge profits from their business transactions. And being a monopoly, these companies are capable of capturing a huge segment of the market, allowing them to amass profits in billions of dollars.

A monopoly is a recognised economic situation wherein only one company captures all or a substantial portion of the market for a specific of product or service (“monopoly” n.d.). A monopoly can occur if a barrier, imposed or not, exists so that other companies cannot enter the same industry (“monopoly” n.d.). In this case, only one company can operate within the industry without any competition (“monopoly” n.d.). Monopolies may occur if one company has vast capital capable of developing the needed economic and production infrastructure for a particular product, or when the government has issued laws favoring a particular company to explore, exploit and develop a particular industry exclusively. . Technical efficiency refers to the maximisation of output based on a minimal input, or otherwise stated, the inputs of capital and labour are minimised while the product output is maximised (Evaluating Perfect Competition n.d.).

In productive efficiency, all available elements of production are utilised at the lowest cost possible for every unit of output (Evaluating Perfect Competition n.d.). It has been postulated that perfect competition is a market structure with assumptions which are most likely difficult to exist in the real market (Riley 2006). For a perfect competition to exist, the following assumptions are required: a) there are numerous small companies that produces “insignificant percentage” of output for the market (each has no control on the market price of the product), b) there are numerous buyers who have no control of the market price, c) the companies are free to enter and exit the industry (this assumes that normal profits are attained by companies in the long run), d) the products are homogenous and are perfect substitutes for each other (each firm takes a fair share and a perfectly elastic demand curve for the product), e) the consumers are sufficiently informed about the products and prices of the different companies (there is no transaction cost just to search for information about the product), and f) there is no externality that arise from production or consumption which is beyond the boundary of the market (Riley 2006).

Perfect competition has four characteristics, which are: a) huge number of small firms, b) similar products, c) perfect mobility of firms, and d) perfect knowledge or products and prices (Markets Types n.d.). Monopolies have