Perfect Competition with Monopoly Markets - Essay Example

? Comparison of the efficiency outcomes of the model of perfect competition with monopoly markets Microeconomics and macroeconomics Teacher name 6th October 2012 Introduction A market is called efficient when resources are used in a way that maximizes the production of goods and services at the lowest cost. Economic efficiency is a relative term; any economy will be more efficient once it manufactures more products and provides more services for society than another by using the same or lower input (Bresnahan 1982). There are two models for market structure namely Perfect Competition and Monopoly markets. Perfect Competition Perfect competition is a model of market structure which attains what can one call efficient distribution of scarce resources. Such efficient allocation is attained due to the profit-maximizing level of goods manufactured by a seamlessly aggressive company results in the marginal cost and price becoming equal (Stigler 1957). As far as short run is concerned, this includes the short-run marginal cost and price being equal. On the other hand, in the longer duration this is observed with the parity between price and long-run marginal cost. In the short run the production of a homogenous product being produced by many other firms is efficient since the price is the same as marginal cost (Mankiw 2003). In other words the worth of the homogeneous product manufacturing is equivalent to the marginal cost of sacrificed satisfaction. Perfect competition creates efficient allocation of resources in the long run also. The long-run fine-tuning of companies arriving and leaving the industry as each of the companies in the business maximizes profits hence creating the subsequent long-run equilibrium state: P = SRMC = LRMC = SRAC = LRAC (Latzko 2012) Graphs above are showing perfect competition. When supply changes price changes and when price changes since a new marginal revenue line is formed therefore the quantity of products that have to be produced for which MR=MC falls. Monopoly Markets A monopoly market is one in which there is only one supplier of a particular good or service (Hicks 1935). As a result of the power supplier has it can charge more conveniently the price it wants, limit the supply and create too many barriers to enrty (Investopedia 2012). Since consumer does not have any other options he or she is faced to buy from the single supplier. Economists recognize several ways of measuring or talking about the ways economies may be efficient; some of the most common include efficiency of scale, productive efficiency, technical efficiency, allocated efficiency, dynamic efficiency and social efficiency (Pindyck and Rubinfeld 2008). Efficiency types are not mutually exclusive; more than one can describe a market or economy. (Web-books 2012) Graph above is showing monopoly market determination of profit. Efficiency of Scale When a producer makes more of something, usually the expense of manufacturing per unit falls. There is limit to this effect; eventually, producing a greater quantity will no longer pay off. When production approaches this limit, there exists efficiency of scale (McConnell, Brue and Flynn 2011). Productive Efficiency Productive efficiency is achieved when a producer uses the least amount of resources to produce goods or services relative to others. The manufacturer might attain this by taking advantage of economies of scale or by utilizing the benefit of having the most helpful manufacturing technology, the lowest paid workers or negligible manufacturing waste. Technical Efficiency A prerequisite for allocative efficiency, technical efficiency describes production that has the least likely opportunity cost. Material and labor resources are not wasted in the production of goods or services in technically efficient production. When it's achieved, technical efficiency allows for but doesn't guarantee allocative efficiency. Allocative Efficiency When a society's value for a certain good or service (the amount they pay for it) is in equilibrium with the cost of resources used to produce it, it is called allocative efficiency (Pandita 2011). It's typically achieved not by accident but when a society allocates its resources to producing what society values most. Dynamic Efficiency Economists use dynamic efficiency to describe a market in the long term. A society with a high dynamic efficiency provides customers greater opportunities of superior quality products or services compared with another society. For instance, as investigation and training of employees’ advances products as time passes, and ensures that premium quality products become cheaper to manufacture, the market encounters raised dynamic efficiency across periods to come. Social Efficiency Social efficiency is a concept somewhat more abstract that the other types of efficiencies. It occurs when the benefit of producing something doesn't outweigh the adverse consequences production has on society. The nature of social efficiency makes it relevant to the discussion of externalities. Externalities are the external consequences of manufacturing on the society and can be adverse or beneficial; for instance, an adverse externality of an electricity generation plant is environmental damage. The role of government One of the roles of government, debated even among those of a libertarian or small government perspective, is that of controlling monopoly markets and guaranteeing rivalry (Krugman 2012). On a larger political scale, the debate may focus on how free or how socialized should a market be, but among those that believe the markets should be as free as possible there is still concern over monopoly practices and how the government could be used as a tool to respond to them. The first step in understanding and forming conclusions in this debate is to determine a definition of monopoly. The three offered here are: One supplier or manufacturer of a product or service; the creation of a monopoly market price; and a company or firm that has been permitted power in the market and superior position by the administration, either unswervingly or not openly (Besanko and Braeutigam 2010). Also, the necessities for competition must be established, which economic textbooks may point to as: some small consumers and producers; homogenized product; and minimized barriers to entry or exit (Varian 2009). After careful evaluation of the meanings of monopoly and the textbook necessities for firm rivalry, I hope to demonstrate that the lone actual necessity for rivalry are “barriers to entry or exit” and that all barriers are due to compulsion, either from administration or illegitimate goings-on between individuals and businesses.. Specific characteristics may include: • Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. • Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market. • Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions. • Perfect information - Prices and quality of products are assumed to be known to all consumers and producers. • Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility). • Profit maximization - Companies goal is to sell that quantity of goods where marginal cost become equal to marginal revenue. This is the point where most profit is generated. • Homogeneous products – The characteristics of any given market good or service do not vary across suppliers. • Non-increasing returns to scale - Non-increasing returns to scale ensure that there are sufficient firms in the industry. Behavioral assumptions of perfect competition are that: Consumers aim to maximize utility Producers aim to maximize profits (Oi 1961). References Besanko, David, и Ronald Braeutigam. Microeconomics. New Jersey: Wiley, 2010. Bresnahan, Timothy F. «The oligopoly solution concept is identified.» Economics Letters 10, 1982: 87-92. Hicks, J. R. «Annual Survey of Economic Theory: The Theory of Monopoly.» Econometrica, 1935: 1-20. Investopedia. Monopolistic market. 1 June 2012 г. http://www.investopedia.com/terms/m/monopolymarket.asp#axzz28X7ZLKmB (дата обращения: 5 October 2012 г.). Krugman, Paul. Microeconomics. London: Worth Publishers, 2012. Latzko, David A. Economics 2. 2012. http://www.personal.psu.edu/~dxl31/econ2/Spring_2006/lecture23.html (дата обращения: 6 October 2012 г.). Mankiw, N. Gregory. Principles of Microeconomics. Boston: South-Western College Pub, 2003. McConnell, Campbell, Stanley Brue, и Sean Flynn. Microeconomics. New York: McGraw-Hill/Irwin, 2011. Oi, Walter Y. «The Desirability of Price Instability Under Perfect Competition.» Econometrica, 1961: 58-64. Pandita, Rahul. Allocative Efficiency. 10 July 2011 г. http://www.buzzle.com/articles/allocative-efficiency.html (дата обращения: 6 October 2012 г.). Pindyck, Robert, и Daniel Rubinfeld. Microeconomics. 7th . New Jersey: Prentice Hall, 2008. Stigler, George J. «Perfect competition perfectly contemplated.» The Journal of Political Economy, 1957: 1-17. Varian, Hal R. Intermediate Microeconomics: A Modern Approach. New York: W. W. Norton & Company, 2009. Web-books. The Monopoly Model. 10 January 2012 г. http://www.web-books.com/eLibrary/ON/B0/B63/051MB63.html (дата обращения: 6 October 2012 г.). Read More