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Perfect competition and pure monopoly are useful benchmarks of extreme kinds of market structure.

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Introduction

Perfect competition and pure monopoly are useful benchmarks of extreme kinds of market structure. Most markets lie somewhere between these two ultimate points. Practically, "in nearly half the 800 major product categories in UK manufacturing 70 per cent of the market is shared by the five largest firms in the industry."(ECONOMICS David begg) Quoting the definitions of the two types of market structure from John Sloman's Book---"Essentials of Economics", perfect competition is where there are very many firms competing. Each firm is relatively small enough to the whole industry so that no single firm can influence the market price by changing its output.. By contrast, monopoly is where there is only one firm in the whole industry and there is zero competition from within the industry. In other words, the firm is the industry. Thus the market demand curve is the firm's demand curve. Though major firms in real world would not operate under there two extremes, is still worth make some research on them. ...read more.

Middle

On the left side of point "e" where output is less than 3, MC curve is below than MR curve. (MR>MC) It simply means there will be a chance to add extra profit to total revenue by producing more units. "As long as MR exceeds MC, profit can be increased by increasing production."(Sloman)By contrast, when output level higher than 3, MC will exceeds MR. (MR<MC) obviously, under this position one more production will add negative profit to total revenue. Thus under a pure perfect competition, the point which firm can make maximum profit is where MC curve across MR curve(MC=MR).As shown before, each firm in perfect competition market has no choice but accept the market price as its own price, so that MR equal to Price(MR=P). Then P must equal MC. Thus the supply curve and the MC curve will follow the same line. Meantime, for price taker firm MR will the same as P (AR).The firm will make its maximum profit when is output at the level of Q. ...read more.

Conclusion

on each goods or services will be just equal to the society's real cost or sacrifice in producing that unit" (Price=Marginal Cost) (Market power&Economics welfare) When this situation is satisfied, total economics welfare is maximum. Hence it can be argue that allocative efficiency and economics welfare are all achieving maximum under perfect competition where MR equals to MC and P. At the equilibrium point B, the output will be made at the level of Qc. Thus at this level MR equal MC.The total revenue therefore is Pc B Qc 0.The total cost as showing on figure is B Qc 0 C. Producer makes a producer surplus as triangle B C Pc which is considered to be its profits. The area 0 A B Qc represents the total utility gained by the buyer of production. That is the amount the consumers are willing to pay. However the consumer actually are only paying the price at Pc so there is a consumer surplus of triangle A Pc B. "The producer surplus plus consumer surplus is the total economics welfare created by perfect competition market."(WEB-CT) ...read more.

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