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

What are the implications for economic welfare of a market structure changing from perfect competition to a monopoly charging a single price? To what extent would you modify your conclusion if the monopoly practiced price discrimination?

Extracts from this document...

Introduction

What are the implications for economic welfare of a market structure changing from perfect competition to a monopoly charging a single price? To what extent would you modify your conclusion if the monopoly practiced price discrimination? Market structure deals with issues that how many buyers and sellers are in the market, whether they make identical or differentiated products, and whether firms can readily enter or exit the market. Market structure is a description of the degree of competition in a market. There are four types of market structure, perfect competition, monopolistic competition, oligopoly and monopoly. The extremes of market structures are perfect competition on the one hand, and monopoly on the other. The different structure of a market determines their efficiency in the use of scarce resources and has different implications for economic welfare. In this essay, I will explain and discuss the implications of welfare when market structure changing from perfect competition to monopoly. In perfectly competitive markets, every firm is a price taker and has no influence on the market price. There are many sellers with identical products and no barriers to entry or exit. To be truly perfectly competitive, all market participants should have complete information for making optimal choices. ...read more.

Middle

The graph below demonstrates the long-run equilibrium in a perfectly competitive market. From the graph, we observe that price equals ATC, so the profit is zero. The firm is producing the quantity where ATC is at its minimum point. All firms wish to minimize the cost of producing a given quantity because reducing costs increase profits. If the firm did not choose to minimize the cost of producing its output by producing on its cost curves, ATC would increase and profit would be less than zero. So all firms under perfect competition are forced to produce at the quantity where its ATC is at the minimum point. But under monopoly, there is a productive inefficiency. The graph above shows the long-run equilibrium for a monopoly. Price is greater than ATC so the profit is greater than or equal to zero. The firm is not producing the quantity where ATC is at its minimum point. Therefore, the monopoly results in productive inefficiency. On the other hand, in the long-run, monopoly has the incentive to innovation. Obviously, the innovation reduces TC and result in higher profits. The additional profit is the incentive to innovate to the firm. In perfect competition, the long-run equilibrium is where profit equals zero. ...read more.

Conclusion

Producer surplus equals total economic welfare in perfect competition. Deadweight loss with perfect price discrimination is eliminated. So perfect price discrimination achieves efficiency. "The more perfectly the monopoly can price discriminate, the closer its output gets to the competitive output and the more efficient is the outcome." (Economics, fifth edition, Michael P) But in perfect competition the economic welfare is the sum of producer surplus and consumer surplus while the producer gets it all under perfect price discrimination. In conclusion, perfect competition results in allocative and productive efficiency. When market structure changing from perfect competition to monopoly charging a single price, there is a deadweight loss to the society. The resources are not used efficiently. Meanwhile, there is redistribution from consumers to the monopoly producer. Moreover, the monopoly leads productive inefficiency because of lack of pressure. But on the other hand, monopoly has the incentive to innovation. It may benefit from the economies of scale. From these standpoints, monopoly is more efficient than we thought. If monopoly practices price discrimination, the economic welfare will increase up to the total surplus in the perfect competition. The price discrimination increases the efficiency of monopoly. "The more perfectly the monopoly can price discriminate, the closer its output gets to the competitive output and the more efficient is the outcome." (Economics, fifth edition, Michael P) However, there is a transfer of surplus from consumer to producer. ...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)

    This eventually puts an end to abnormal profits being made Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets.

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

    The theory of perfect competition also is based on the assumption that firms seek to maximize profits. Economic profits indicate whether or not resources are being directed to their best use. They represent the amount by which revenue exceed total opportunity costs2.

  2. Monopoly. The following is going to discuss that monopoly is always against the ...

    The supernormal profit (abnormal profit) earned is shown by the shade area. As there are lots of barriers erected to prevent supernormal profit being competed away, so the profits will be maintain in the long-run. The firm will produce output where MR=long-run MC.

  1. What is a Monopoly?

    This is the competitive price of Pc and with a smaller quantity that the competitive quantity of Qc. The profit the business gains; is the shaded area, labelled profit. Monopolies develop in various ways, horizontal integration, vertical integration, creation of a statutory monopoly, franchises and licences, internal expansion of a firm etc.

  2. 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.

  1. 'Although corporate pricing decisions are influenced by many different factors, fundamentally prices will reflect ...

    It is known that a seller prefers to have a monopoly than to face competition. In general, we think of monopoly prices as being somewhat higher than competitive prices, and of monopoly profits as being higher than competitive profits (which are in the long run merely equivalent to a normal rate of return).

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

    the only way to compete is through product differentiation. This is achieved by constant innovation, and by incessant advertising. Out of the four market structures (discussed on pages 1 and 2), oligopoly is most likely to develop the innovations that: * Advance the level of technology * Expand production capabilities * Promote economic growth * Lead to higher living standards.

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