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

Competition leads to a more efficient use of resources. Discuss.

Extracts from this document...


Competition leads to a more efficient use of resources. Discuss. The word "efficiency", in economists' dictionary, is often interpreted into the degree of an economy allocates scarce resources to meet the needs and wants of consumers. As we can see that a free market economy is the one in which resources are allocated based on the principle of self-interests. Where there are profits, there are firms, and where there are firms to produce identical goods and services, inevitably, there is competition. The degree of competition determines the market structure which is the main determinant of the behaviour or conduct of firms. This in turn determines the efficiency in the use of scarce resources. It is often argued that competition leads to a more efficient use of resources. I agree with the statement, but not totally. In my opinion, competition would lead to efficiency and best use of resource by encouraging firms to improve productivity, to reduce price and to innovate, but in certain industries, particularly industries where the impact of economies of scale is distinctive, for example industries with great indivisibilities, monopoly is more favourable. Economic efficiency can be seen to maximizing total utility from a given amount of scarce resources. ...read more.


(Low, p54) However, monopoly is another kind of extreme market structure where there is only one firm in the industry. The firm therefore has the power to decide the market price in relation to its amount of output and the firm's average revenue is the market downward-sloping demand curve. This is shown in figure 2. The profit-maximizing monopolist will produce an output of Qm and charge the price at Pm, where MC=MR (point A). Yet, only price equals marginal cost which is at Q3 and P3 (point E), can allocative efficiency be achieved and only MC equals AC which is at Q2 and P2, can productive efficiency be achieved. So a monopolist would produce less and charge higher than firms under perfect competition. A monopolistic economy, in this way, would be much more inefficient than a perfectly competitive economy. Just like Adam Smith noted: "The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. (Resource: Smith The Wealth of Nations. ...read more.


(Shepherd, p203) By whatever process innovation or product innovation, the monopolist has not only enhanced its own surplus but also increased consumer's surplus by setting a lower price and a higher output, as we can see the enlarged darker areas showing the increase in both producer's and consumer's surplus in figure 5. Therefore, in these circumstances, although competition would lead to efficiency, monopoly may be viewed as being preferable to perfect competition because of the efficiency gained in forms of scale economies and the incentives of research and development. To sum up, firms under perfect competition produce at the price of the lowest cost and optimal output which would lead to both allocative and productive efficiency and maximize social utility. However, as the competitive firms are too small to make any impact on the market, they are not able to produce goods and services at a even lower level, whereas monopoly who has the full control over the market is big enough that it will lead to scale economies which can push the cost to a lower level-even lower than that in perfect competition in certain industries, even though it is not efficient at its own production level because it still can get supernormal profit by setting a higher price and a lower output compared with its own optimal output. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics 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 GCSE Economy & Economics essays

  1. Peer reviewed

    State the assumptions of perfect competition. How does a perfectly competitive industry work in ...

    4 star(s)

    Therefore as a result of this if a firm charges a higher price than the market equilibrium price there demand will fall to zero as the buyers will be able to choose from any of the other firms in the market.

  2. The allocation of resources

    By doing so, we receive "certificates of performance.'' In the United States, we call these certificates dollars. Elsewhere they are called pesos, francs, marks, yen, and pounds.

  1. Use game theory to analyze an oligopoly competition of two great rivals, Wal-Mart and ...

    China Internet is far more backwards than one of the rest of the world, especially what concerns business use. Besides that, most China suppliers are not provided with modern software or actual data bases. That's why they can exchange only small amounts of the simplest data.

  2. "If real world markets can be made to resemble more closely the model of ...

    Finally farmers produce a range of homogenous products. King Edwards's potatoes from one farm are indistinguishable from King Edwards's potatoes from another. In Europe and in many countries around the world, farming is in certain instances not a perfectly competitive market.

  1. Critically evaluate the perceived competitive starategies of the five clothing retail outlets, namely Edgars, ...

    branded products in South Africa. U.S. apparel has a reputation in South Africa for superior quality. South Africans are prepared to pay top dollar for American products because they get value from American products. South African consumers follow U.S. fashion and culture very closely. The "American image" sells.

  2. Biography of Adam Smith.

    the defence of the rich against the poor, or of those who have some property against those who have none at all.'' Smith never suggested that government should not intervene to set and enforce minimum social, health, worker safety, and environmental standards in the common interest or to protect the poor and nature from the rich.

  1. Business Competition.

    in some case to some customers may be more important than price. Availability Availability of a product or service is also important feature of competitiveness. Staying open late so customers can come and shop after work, Sunday opening is an advantage for those who work long hours, maintaining stock availability,

  2. This report will establish the opportunities and threats presented to Sony by the EU ...

    and Mini Disc's because these products are very similar to other rivals. Whereas, the PS2, DVD players and TV's shouldn't be standardise because adaptation can be done to these products interiorly and also the outside colour could also be changed to suit the culture of any EU country.

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