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The Tendency of the Firm in a Monopolistic Market - Essay Example

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The paper describes two different market types of the market which are perfect competition and imperfect competition. In perfect competition, there are very many firms involved competing with each where each action does not affect the industry…
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The Tendency of the Firm in a Monopolistic Market
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Download file to see previous pages These differences between perfect competition and monopolistic competition have social welfare implications. In perfect competition, marginal revenue is the same as price and this reflects the optimum utility of goods as the price is also equal to marginal cost. Supply also meets the demand at the most efficient level. This is illustrated in Figure 1 where supply and demand achieved equilibrium. The case is different in a monopolistic competition where there are few or no competition. The tendency of the firm in a monopolistic market is to restrict production as can be shown in Figure 1 to drive prices up as represented by P1. The market then becomes inefficient because firms are not producing at a minimum cost where price is much higher than the cost of production. This has an implication in social welfare as inefficiency would mean requiring more resources to achieve the same utility of good thereby increasing the social cost. This is not the case in a perfect competition where marginal revenue is the same as price. In the diagram in Figure 2, a competitive market achieves an equilibrium where demand is met with supply (MC and AR intersect). It meant that the social service can be had at its cost and is, therefore, the most optimum level where the needed service is appropriately supplied without waste. Thus comparing perfect competition with a monopolistic market, price in the monopolistic market is higher as shown in P1 compared to Price of perfect competition in P2. Production is also inefficient in the monopolistic market as shown by Q1 as it is deliberately restricted to drive the price or P1. ...Download file to see next pagesRead More
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