Perfect Competition and Monopoly Market Structure - Essay Example

Business operates in different markets which have different characteristics suiting the needs and requirements of the business. There is various type of business structure that has been identified. The different types of market structure are monopoly, monopolistic competition, perfect competition and oligopoly. Each market has a different set of characteristics and business has to work accordingly. The paper here looks into the perfect completion and monopoly market structure by comparing both the market structure to determine which, is a better market structure in terms of resource utilization. This will help to understand the manner in which the players can be efficient in utilizing the resources. Before moving on it is important to understand the following terms Aggregate demand: of good in an economy is the sum total of all individual demands (Boyes & Melvin, 2008) Aggregate supply: of good in an economy is the sum total of all individual supply of goods (Boyes & Melvin, 2008) Perfect Competition is a type of market structure which is at the extreme end of the market structure chart as compared to monopoly which falls on the other end of the market structure chart. Both of this market structure has different type of characteristics making the players confront with different situation working in the market. (Skeath, Velenchik, Nichols & Case, 1992) This helps to differentiate the market structure and determines the efficiency of each market structure. The chart for the different type of market structure is present below Perfect competition is a type of market where there are many players selling homogenous product, having independence of movement within and outside the market. (Machovec, 1995) The following are the characteristics of perfect competition Many Players: Perfect competition is a market characterised by large number of players. For example the UK has a large number of cable providers suggesting that the structure of the market is perfectly competitive. There are many suppliers so they have a low bargaining power. The main providers are “Small world media, Wright Cable and Virgin Media”. (Grant, 2007) Homogenous products: Players in a perfectly competitive market sell similar products with little to choose from. (Competition, 2011) It is very difficult to think of a product which is perfectly homogeneous because some degree of differentiation remains in the products. The product which matches the perfectly competitive market to a high extent is the agricultural products. Perfect Knowledge: Players and customers in a perfectly competitive market have complete knowledge about the product. (Competition, 2011) This makes it important that the players look towards ways to differentiate themselves. It is important that forms operating in the perfectly competitive market advertise. Since there are large number of buyers and sellers selling homogeneous products so advertising will help the business to differentiate their product. It will also help to create a different perception in the minds of the consumer which will help to increase profits and revenues for the business. Freedom of entry and exit: There is freedom on the part of the players to enter and exit business. (Competition, 2011) Since there is transparency and profits are low it ensures that business can look towards developing a strategy which pays them good return thereby enabling firm to enter and exit the market. Since there are many people who deal in agricultural products and also there is very little differentiation among the products as they are homogeneous and freedom of entry and exit makes it match the criterion of a perfectly competitive market. The graph for a perfectly competitive market in the long run looks as follows It shows that the firms have zero super normal profit in the long run. Firms continue to earn normal profits which are included in the cost and continue their operation by looking towards increasing their volume of business. An interesting fact to note is that a firm operating in a perfectly competitive market should continue its operation in the short run as long as it is able to recover the variable cost. Since, in the short run certain factors of production are fixed and if the firm doesn’t continue operations then it will lose the fixed investment as they have to be incurred irrespective of the production. This makes it important for the firm to continue its operation as long as the variable cost is covered. (Perfect Competition, 2011) The firm thereby earns profit in the short run as seen below In the long run a firm incurring losses cannot continue its operations as all factors of the production are variable. There is no fixed factor of production. So, if a firm continues operations while it is not able to cover its variable cost would mean loss for the business and will require to be shut down. This thereby helps to ensure that the business is able to use the factors of production efficiently. Monopoly on the other hand is an extreme form of market structure where there is a single seller selling the product. The player in the market is a price setter and dominates the market by having a high bargaining power. Since, this type of markets hardly exist for a long period of time as new discoveries or innovations get copied thereby making it difficult for such a structure to exist. The monopoly form of market structure has the following characteristics Single Seller: Monopoly is a market structure which has a single seller selling the product. The player dominates the market and determines the price for the product. (Moffat, 2011) Unique Product: The player selling the product is unique. It is difficult to think of a product which is unique for a long time. (Moffat, 2011) Innovation help the products to be unique for a certain period of time but with the passage of time the product gets copied thereby breaking the characteristics of a monopoly. Barrier to entry and exit: The cost involved in technology, infrastructure and others makes it difficult for players to enter the market. (Moffat, 2011) This puts a cap on the barrier and entry as the initial investment is huge. Incomplete information: Other players in the market have incomplete information compared to the main player. (Moffat, 2011) Since the information is valuable and has to be preserved player looks towards ways to ensure that the market has incomplete information regarding the product. These characteristics of monopoly help to determine the market structure both in the long and short run as follows. The players continue to earn profit both in the short and long run as there is a single player. If more players enter it will break monopoly leading to a situation where monopoly doesn’t exist. This, monopoly continue to earn profits both in the long and short run as seen below (Monopoly, 2011) Thus the perfect competition and monopoly market structure differs in the manner they perform which also differentiates the manner in which efficiency is achieved in the market. Perfect competition due to the presence of many players and having identical products provide better use of resources compared to monopoly where there is a single player. Since, players in the perfect competition model of market structure looks towards reducing cost by using resources in the most effective manner it ensures that the market structure is able to achieve economies of scale. Players in the perfect competitive market structure looks towards ways to increase their return through efficient utilization of resources. This results in a better product at the correct prices to the consumers. This helps to wipe of the extra gain that businesses would have earned in the monopoly market structure. Perfect competition thus ensures that there is better utilization of resources. Since players in the perfect competitive form of market structure looks towards ways to increase their sales and achieve economies of scale it results in proper utilization of the depleting resources. (Economies of Scale, 2011) Monopoly on the other hand doesn’t have the same structure and look towards providing the goods and services even at a higher cost results in inefficient use of resources. The paper thus presents the manner in which perfectly competitive market is able to achieve efficiency in the use of resources compared to monopoly which is an inefficient allocator of resources. The paper also highlights the different characteristics of the market structure and the manner in which it helps to contribute towards efficient use of resources. The paper presents various examples looking towards the different market structure models and throwing light on the manner the different market structure looks towards utilizing the resources. The paper finally presets the way perfectly competitive market helps to provide the correct price thereby helping in efficient use of resources. References Boyes W & Melvin M, 2008, “Macro economics”, 7th edition, Houghton Mifflin Company Competition, 2011, “Perfect Competition”, retrieved on January 4, 2011 from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=perfect+competition Economies of scale, 2011, “Economies of scale”, retrieved on January 4, 2011 from http://moneyterms.co.uk/economies-of-scale/ Grant T, 2007, “UK television and film industry makes good progress towards greater financial reporting transparency”, UK film and television industry, Lords press notice Perfect Competition, 2011, “Perfect Competition”, retrieved on January 4, 2011 from http://www.basiceconomics.info/perfect-competition.php Monopoly, 2011, “Monopoly”, retrieved on January 4, 2011 from http://www.economicshelp.org/microessays/markets/monopoly.html Machovec F M, 1995, “Perfect Competition and transformation of Economics”, p. 391, Routledge, London Moffat M, 2011, “What you need to know about monopoly and monopolies power”, retrieved on January 4, 2011 from http://economics.about.com/cs/microeconomics/a/monopoly.htm Skeath S, Velenchik A, Nichols L & Case K, 1992, “Consistent comparison between Monopoly and Perfect Competition”, Journal of Economic Education, Volume 23 Read More