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Economists always analyse economic situation through looking at the market structure.

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Introduction

Economists always analyse economic situation through looking at the market structure, which is a description of the degree of competition in a market. Tow extreme models of market organization are perfect competition and pure monopoly. In substance, the difference between the two models above will cause the different performance and efficiency in the use of scarce resources. As a result of this, the economic welfare, (means the benefit which two individuals both get from a voluntary trade.) will be different. This essay will explain what the implications for economic welfare of a market structure changing from perfect competition to a monopoly charging a single price are, and modify the conclusion when the monopoly practiced price discrimination. The explanation of perfect competition and pure monopoly is the starting point of this essay. In perfect competition, first of all, there are many competing firms in the industry; so any of them do not have enough power to affect the price of the product. Secondly, it is absolutely free for a new firm to entry or exit the industry. Thirdly, the firms produce homogeneous products, which means there is no branding or advertising. Fourthly, every buyer and seller is aware of the prices throughout the market. ...read more.

Middle

Where the curves intersect- the competitive equilibrium- both consumers and producers are efficient.' At the first place, the sum of consumer surplus (triangle ABC) and producer surplus (triangle BCD) is maximised and price equals marginal Figure 2. Efficiency of Perfect Competition and Pure Monopoly P P S=MC A a MC Consumer surplus Consumer surplus b Pm cDeadweight Monopoly's loss Pc C gain B e Pc d f D D g MR D Producer surplus Efficient Quantity Producer surplus O O Qc Q Qm Qc (a) Perfect competition (b) Pure monopoly cost, which has been provided above from Figure 1. It shows that resources are used efficiently. In addition, as Slaman (2001) said ' the combination of (long run) production being at minimum average cost and the firm making only normal profit, keeps prices at a minimum.' In other words, perfect competition is productive efficiency, too. Last but not least, competition keeps people 'on their toes'. Every firm in a perfect competition situation can always aware of crises. Inefficiency means 'out of action'. So they must improved technology then keep productive efficient. As mentioned in the first paragraph, economic welfare can also be defined as follow: economic welfare is the consumer surplus (the benefit to the buyers) ...read more.

Conclusion

The deadweight welfare loss will be reduced to the minimum limit or even eliminated. There is increased allocative efficiency. And also the increased output may lead to economies of scale and increased productive efficiency. As things are, the total economic welfare will stay at the same level, although the proportion of consumer surplus and producer surplus will change. Yet to collect the entire consumer surplus from every buyer, the monopoly have to offer each individual customer a single price, which is based on customer's own willingness to pay. Obviously, such price discrimination cannot be enforced in practise because of the lack of individual information about each consumer's demand curve. Judging from the above, economic welfare will reduce during the process of changing from perfect competition to a monopoly charging a single price. The essential reason is deadweight loss, which is caused by monopoly inefficiency. But there is no implication to economic welfare if the monopoly practices price discrimination. Market economies need reasonable competition to keep it running effectively. Without proper competition, firms become inefficient, which will slow down the economy development and lead to a serious social X-inefficiency.. Reference Maunder, P. et al. (2000), Economics Explained, Collins, London. Parkin, M. et al. (2003), Economics, 5th Edition, Pearson Education Limited, Essex. Sloman, J. (2001), Essentials of Economics, 2nd Edition, Pearson Education Limited, Essex. Stiglitz, J.E. & Driffill, J. (2002), Economics, W.W.Norton&Company, London. www.tutor2u.net 1 ...read more.

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