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

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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.

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