• 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)

    Firms in a perfectly competitive market are able to make abnormal profits, however not for a sustained or great deal of time as there are no, or limited barriers to entry in a perfectly completive market thus other firms see that there are abnormal profits to be made and enter the market producing exactly the same product.

  2. Differences between monopoly and monopolistic market competition.

    On the other hand, monopolistic market is defined by Yogesh Ambekar (2000-2009 at buzzle.com) as a situation whereby one firm produces a particular service generally without any close substitutes or similar products, and the firm makes maximum profit in an industry.

  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. Discuss the view that monopoly power is always negative from a consumer and economic ...

    A monopoly is able to decrease their prices to such an extent that it is impossible for new firms to enter the industry. This is because it is not possible for new entrants to maintain cost, charging a low price as well as producing effective amounts of abnormal profit as the monopoly.

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

    These include natural cost advantages such as ownership of all key sites in an industry, marketing barriers, restrictive practices designed to force and competitor to leave the market. These barriers to entry seem to be unfair on new entrants because their chances of breaking into the industry are slim because

  2. 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.

  1. what is economics

    in the market is in the hands of the producers * This is whether we are dealing with tangible goods (mobile phones, food, clothing) or services * Supply seeks to satisfy consumers, but the main motives of suppliers are to do with profit * Economics assumes that the behaviour of

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

    Tesco, for example, will keep a small group of staff analysing Sainsbury's activity in the grocery industry. A decision that Sainsbury's make will affect Tesco, and vice versa, so therefore, interdependence is always exhibited as a behavioural tendency, in the oligopolistic market.

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