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

Evaluate the view that greater economic efficiency (allocative and productive efficiency) will always be achieved in perfect competition compared to monopoly.

Extracts from this document...

Introduction

Evaluate the view that greater economic efficiency (allocative and productive efficiency) will always be achieved in perfect competition compared to monopoly. Perfect competition is when there are many firms in the market which have no control over price (price-takers). All firms sell a standardized product and there are no barriers to entry and exit. On the other hand, a monopoly is a single large firm in the market that has significant control over price (price-maker). The firm sells a unique product with no substitutes and there are high barriers to enter into the industry. Allocative efficiency is given by the condition when price (P) = marginal cost (MC), and productive efficiency is given by the condition when price (P) = minimum average total cost (min ATC). ...read more.

Middle

In other words, economic efficiency is achieved in a perfectly competitive firm because in its long-run equilibrium, Pe = MC = minimum ATC. Figure 2 shows the long-run equilibrium of a monopolist firm. The diagram clearly shows that a monopolist firm does not achieve economic efficiency (productive and allocative efficiency) in the long run. At the profit- maximizing level of output Qm, price (Pe) is higher than marginal cost (MC), which means Pe = MC, therefore there is a misallocation of resources. The fact that P > MC means that some consumers place a greater value on the production of the good than it costs the monopolist to produce it. ...read more.

Conclusion

In monopoly, there is an under-allocation of resources to the good; in other words, goods and services produced do not represent what consumers most prefer. This is shown on Figure 1 that Pe > MC, which indicates allocative inefficiency. The monopolist produces at a higher price than the lowest possible cost. This is shown on Figure 1 that P > min ATC, which indicates productive inefficiency. As discussed throughout the article, although to a certain extent perfect competition is an abstract and unrealistic market structure, I would say that the view that greater economic efficiency will always be achieved in perfect competition compared to monopoly is true, due to the fact that in a perfectly competitive firm, P = MC = min ATC, and in a monopolist firm, P > min ATC > MC. ?? ?? ?? ?? Michel Mak 12E ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate 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 International Baccalaureate Economics essays

  1. Evaluate the view that governments should always prevent firms from being monopolies.

    Anti-competitive behavior for example can be legal and illegal. If a new firm joins the industry the monopolist lowers its price to a loss-making level and is able to survive the time where the firm is making losses. But the new firm has to lower its prices as well to

  2. The structure of the EU budget and its allocation

    Focusing on the implementation of the initial budget without the unmobilised reserve for European Globalisation Adjustment Fund (EUR 415 million), the implementation of commitments amounted to 99 %, leaving a balance of EUR 209 million unused. The largest variation between initial appropriations and their actual implementation in implementation took place

  1. An analysis of why economic sanctions are good

    Citizens of countries oppressed by economic sanctions suffer when intended relief efforts are suppressed by their own government intercepting supplies. The citizens are never the target, but rather the behaviors of corrupt leaders. Natural rights of citizens are denied when a corrupt leader interrupts the harmonious relations and it becomes necessary to impose sanctions.

  2. Economics Extended Essay - To what extent has the market for paintings in South ...

    Since they entered the market to buy paintings, the demand increased which in turn increased the price. The market moved from point A to point B. The art market was suddenly made into a market that had speculation being one of the main factors that determined price.

  1. Monopolies or Perfect Competition

    This means that the consumer is getting a more reasonable price for the good that they are buying.

  2. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    In addition, the Portuguese merchants gained access to the interior via the Senegal and Gambia rivers, which bisected long-standing trans-Saharan routes. This allowed the Portuguese influenced, Senegambia and Guinea trade to expand into new markets and vastly increase the goods of which they can trade and trade for.

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

    This prevents consumers from becoming victims of large monopolies setting high prices, to maximize profit. The firms in a perfectly competitive market achieve allocative efficiency, meaning that AR=MC, or the amount of goods being supplied is at an optimal level for consumers.

  2. Economic article analysis. The statement made by Ongkili indicates that the fishery industry of ...

    3.3 Shortage Furthermore, the article had also stated that China is one of the countries which have high demand on Malaysia's exported marine products (Revolutionise fishery export industry: Ongkili 2009).

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