Question:Monopoly is often considered to be inefficient compared to perfect competition - Assignment Example

Absence of competition gives the monopolist significant market power that gives it undue leverage over buyers like imposing a price higher than normal. A monopoly has two aspects which are its pricing power and marketing behavior towards its consumers (Trivedi 485). Perfect competition is the exact opposite of a monopoly in modern economics. In this particular instance, a perfect competition exists in the market when there are many market participants (interested sellers) and no single seller is big enough to have the kind of market power that a monopoly has.

The effect is that not a single market player or participant can impose unilaterally the price of a single or homogenous product on its own because other market players or competitors will then come in and price lower. Some economists call perfect competition as “pure competition” but this is a concept that is debated because perfect competition may exist only in theory as the conditions for it are very strict; what economists contend is the existence of imperfect competition which is the closest ideal to having a perfect competition as no perfectly competitive market can ever exist.

Two key factors describe what is perfect competition: there are many buyers and sellers, and also no entry or exit barriers. In a monopoly, there are market inefficiencies because the monopolist has no kind of incentive to improve the product or service; this results in a shoddy product or bad service. It also results in a pricing mechanism that is distorted by the lack of viable competitors who can offer a better product or service at a lower price. Moreover, there is no incentive in monopoly to respond to changing market demands such as by increasing production or output.

In perfect competition, there is no under-utilization of productive capacity as all available capacity is to be used to meet market demand to maximize the firms profit