• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

"Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly."

Extracts from this document...

Introduction

ECONOMIC'S ESSAY "Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly." Adam Smith said that competitive forces function like an "invisible hand" to ensure that people pursuing individual interests simultaneously serve interest of society. Competition among economic agents would therefore narrow selfish interest of each person in a sociable desirable direction1. Therefore perfect competition would lead allocative or economic efficiency. On the other hand monopolies could lead to lower cost due to economies of scale. Although in the real world it is very difficult (almost impossible) to have a pure perfect competition or monopoly, both of them, in theory, bring benefits to society. In order to evaluate whether perfect competition is a more efficient market structure than monopoly, there has to be a direct comparison between the two market structures to draw conclusions. In theory, the existence of positive economic profits in any given industry attracts new firms, therefore the supply increases and the price lowers to the point where normal returns are earned by the representative firm. Perfect competition is a market model. It has various characteristics. The market contains a large number of buyers and sellers. Each buyer and sellers has a perfect knowledge about prices and product. The product being sold is homogeneous; this means that it is not possible to distinguish the product of one firm from that of other firms. ...read more.

Middle

The most fundamental difference between perfect competition and monopoly lies in the determination of the price. Perfectly competitive firm is a price taker while monopolist firms are price searchers. Price Searcher Graph The demand curve for a price searcher faces a downwards sloping. Unlike the perfect competitor, the price searcher cannot sell all it wants at the going market price. Price searchers are price makers because they have power to set their own price. Their decision is based towards maximizing profits. Profits are maximized also when marginal revenue (MR) and marginal costs (MC) are equal. Monopoly Profit Maximization In the case of monopolist, the distinction between the short run and the long run is not important because barriers prevent new firms from entering the industry and systematically eliminating monopoly profits. The diagram shows that monopoly market structure has different implications. First monopolies, unlike perfectly competitive firms do not need to produce where average costs are minimised. Monopolists also charge a grater price than marginal costs. The firms in a monopoly market structure also only produce where demand is elastic. This is done so that the firm maximises the profits because if MC=MR the demand schedule has to be elastic to have profits and not losses. There is no supply curve either for monopolies due to the fact that the amount of output is decided not on the price, but on the marginal revenue depending on the elasticity of demand. ...read more.

Conclusion

Therefore monopolies have clear dynamic advantages. Perfect competition would also be allocatively inefficient if externalities are taken into account. Externalities exist when economic activity results in direct economic cost or benefits for third parties not immediately involve in the activity. Consequently the statement of perfect competition being more efficient than monopoly is not entirely true. In conclusion, although perfect competition is more economically and productively efficient than monopoly, monopolies have dynamical advantages. Monopolies can exploit economies of scale and economies of scopes which in theory would lower cost. Also perfect competition doesn't include externalities in which case it wouldn't be efficient. Even though it is almost impossible to have a pure monopoly or a pure perfect competition market structure in an economy, perfect competition seems to have an advantage regarding static efficiency over monopoly. The question now is whether a perfect competition market model is more desirable over a monopoly market model. Economics Essay By: Santiago Caicedo 10-5 Topic: Perfect competition and Monopoly. Research question: "Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly". 1 ROY J. RUFFIN, PAUL R. GREGORY, "Principles of Economics" Chapter 30 pg.563 Fifth Edition 2 ROY J. RUFFIN, PAUL R. GREGORY, "Principles of Economics" Chapter 30 pg.566 Fifth Edition 3 ROY J. RUFFIN, PAUL R. GREGORY, "Principles of Economics" Chapter 30 pg.610 Fifth Edition 4 ANNE KRUEGER, "The Political Economy of the Rent-Seeking Society." American Economic Review 64 (June 1974). 5 HARVEY LEIBENSTEIN, "Allocative Efficiency vs X-Inefficiency", American Economic Review56(June 1966) ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Using transport examples throughout, explain the impact of market structure on economic efficiency and ...

    It is also reached when consumer are provided with the goods and services which they want. X-efficiency or no X-inefficiency is reached because costs are reduced to a minimum and so there is no organisational slack. Firms within the perfect competition model will make normal profits in the long-run due

  2. Outline the economic argument against monopoly. Is there anything which can be said in ...

    If this doesn't happen, then people will stop buying the product. Some firms have good quality products but to compete in a competitive market they have to set their prices low in order to compete. It could be said that in favour of a monopoly because they will get a reward in higher profits for the quality of their product.

  1. In this essay, I will analyze and compare the two extremes of market structure ...

    The firm can set price for its products. However, monopoly firms cannot whatever price they like, they can only charge the maximum price that the consumer is willing to pay There are three conditions that give rise to a situation in which one seller or one firm is able to

  2. Evaluate the role played by barriers to entry in the long run

    of research and development is carried out to try and gain the competitive edge in the market. 4. Monopoly - In this market, a specific company or business has majority market share thus being able to determine prices without much of a change to their demand.

  1. Assess the costs and benefits of an extension of the tube line to Croydon

    They have a positive effect on a third party not involved in the economic decision and are shown by the difference between social benefits and private benefits". Possible external benefits of this development include the alleviation of congestion on existing modes of public transport (e.g.

  2. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    Also there are sunk costs and natural cost advantages, which may prove to be successful barriers. Costs that may be un-recoverable are sunk costs, which mean that when money is spent on a sunk product or service, the money cannot be returned.

  1. Technological Change and Markets & The Case For Public Ownership of Utility Companies.

    of colluding together by restricting output, increasing profits and therefore taking away consumer surplus. Also, in the case of utilise, it may be argued that promoting completion would be inefficient as only ?natural monopolies? can survive due to the high minimum efficient scale required by firms in order to produce.

  2. Economy and how it affects my business selling tables

    This will benefit my business because the cost of raw materials will be cheaper for me and due to this I will have the ability to profit more and therefore run my business more effectively and progressively. Q15. UK unemployment graph between the years 2000 and 2011.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work