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

In this essay, I would like to take a view at the implications for economics welfare of a market structure changing from perfect competition to a monopoly charging a single price and what else would happen if the monopoly practiced price discrimination.

Extracts from this document...

Introduction

Economic welfare is the benefits the buyers or sellers gain when buying or selling based on which a voluntary trade between two individuals will take place. It differs while in different market structures. Hence in this essay, I would like to take a view at the implications for economics welfare of a market structure changing from perfect competition to a monopoly charging a single price and what else would happen if the monopoly practiced price discrimination. Market structure is a description of the degree of competition in a market. The market structure under which a firm operates will determine its behaviour; this behaviour then will in turn affect the firm's performance or efficiency in the use of scarce resources. (Sloman, 2001, p120) According to the degree of competition, the market structure can be divided into four categories: perfect competition, monopolistic competition, oligopoly and monopoly. The extremes are perfect competition and monopoly. In perfect competition, there are many sellers and buyers under extreme competitive condition, and all the firms in it have no power to affect the price of the product, they are all 'price takers'. The products they produce are homogeneous and there are no barriers to entry, if the level of profitability is high, every firm can enter the market freely. ...read more.

Middle

In perfect competition, marginal revenue equals price, so the profit maximizing point is Qpc where marginal revenue equals marginal cost. For a monopoly, the marginal revenue curve is always below average revenue curve, the profit will be maximized at Qm. Therefore, a monopoly will produce less and charge a higher price than a competitive industry. Then, I would like to turn to economic welfare. It is the benefits gained by the buyers and sellers, of which the benefits gained by the buyers is called consumer surplus and that gained by the sellers is known as producer surplus. The economic welfare is the consumer surplus plus the producer surplus. Consumer surplus is the difference between the price the consumers are willing to pay and that they actually pay. It can be illustrated by the marginal utility curve and is determined by the demand curve. Producer surplus is the difference between the price the producer are willing to accept and that they actually accept. It can be illustrated by the marginal cost curve and is determined by the supply curve. (lecture notes) Therefore, according to Figure5, in perfect competition, the total utility gained by the consumers is 0ABQ, what they actually pay is 0PBQ which is what the producers' total revenue, but they the amount of total cost they spend is 0CBQ. ...read more.

Conclusion

The firms in perfect competition are too small, they have to struggle for survival and therefore have no additional resources to spend on research and development. The result is that their technology of production always be backward. But monopolist does not need to be too worried about its survival, so it could spend a lot on research and development to increase its productive efficiency. Moreover, the situations above are all under the condition of that the firms charge a single price, a monopolist could maximize its profit by applying perfect price discrimination. This refers to charging different prices for different units of the same goods or service. Firms always try to click up consumer surplus. According to Figure8, if the monopolist can apply perfect price discrimination by selling each unit at the maximum price the consumers are willing to pay, the producer surplus is shaped tri-angle ABC, and the consumer surplus is all converted into producer surplus, but the economic welfare equaling the producer surplus does not decrease. To sum briefly, as a general rule, the perfect competition could make a greater economic welfare,, but in some cases, monopoly could be more efficient by applying its advantages well. To some extent, the amount of economic welfare is contingent. ...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. Marked by a teacher

    Explain how the equilibrium level of output is determined in perfect competition. Both for ...

    4 star(s)

    In the short run the equilibrium market price is determined by the interaction between market demand and market supply. The long run equilibrium for a perfectly competitive market occurs when the marginal firm makes normal profit only in the long term.

  2. Differences between monopoly and monopolistic market competition.

    An example of this is the Microsoft Company owned by Mr. Bill Gates, in this case he has taken advantage of this market completely. The diagram above represents the monopolistic competition market. It's characteristics are in direct contrast with that of monopolistic competition, they are: 1.

  1. What are the implications for economic welfare of a market structure changing from perfect ...

    Profit is maximized at point B, the intersection of MR and MC. The amount of consumer surplus (the difference between a buyer is willing to pay and the amount the buyer actually pays) at price Ppc is the triangle ABPpc.

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

    For example, Santiago has a motorcycle business. Santiago has placed $60.000 of his money into his own business. However, he could earn $2000 per month working as a motorcycle seller at another motorcycle shop. Moreover, Santiago's capital investment in his own business might earn $500 monthly elsewhere.

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

    With companies constantly entering and leaving a market with low barriers to entry there simply cannot be prolonged periods of supernormal profit and there is little retention due to the simple fact that information is too easily available and companies will soon be able to manufacture the 'innovative' product that the leading competitor already has made.

  2. what is economics

    something is outside the price we are willing to pay, then there will be no effective demand for it * To be more specific, it is best to look at income in terms of what is left over once tax has been deducted, state benefits are added and the effects

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

    Advertising 2. Product Differentiation Like any firm, an oligopolistic firm seeks to attract consumers and increase market share, while sustaining the price. This way, the firm will maximise their profits. Sometimes two oligopolistic firms can co-operate to increase welfare in the market.

  2. Analyse and comment upon the pricing and output decisions of the firm and the ...

    A monopoly is a market structure in which a single firm or a combination of firms collectively as one firm, supplying al the output in the market. Since the firm supplies all the market output, it can influence either price or the level of output but not at the same time.

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