Monopoly is less efficient than perfect competition---Do you agree?

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Ivor Lloyd-Rees                                                   ECONOMIC ANALYSIS OF THE FIRM

  1. Monopoly is less efficient than perfect competition---Do you agree?

Monopoly and perfect competition are alternative market structures and differ, on a general level, in the degree of competition that exists between the firms and the industry they are supplying to.

We can define perfect competition as being a market structure in which there are many firms, as opposed to a monopoly where there is just one firm in the industry, and therefore little or more likely no competition from within the industry. A perfectly competitive market has unrestricted entry and because of the number of firms nobody in the market believes that their actions will have an effect on the market place. Firms will therefore behave very differently in these two market structures, being influenced by cost conditions and demand. This behaviour will have subsequent effects on performance in the market, mainly their efficiency. We therefore have two aspects to consider that will affect the efficiency of a firm, the market structure and behaviour. They are crucial to our understanding.

Perfect competition is uncommon, in fact there are only a few industries that work under this market structure. A good example is that of agriculture where there are a large number of farmers supplying the market yet none can influence price as none are large or powerful enough. If a farmer decides to double output supply will increase, pushing the supply curve to the right. However, why is this change so difficult to see on supply graphs? This can be explained if we remember that a farm is so small that the increase in supply will be very limited and it will be impossible to distinguish it on the demand curve:

Price will not change, as the extra output is so insignificant. A farmer, therefore, does not have the power to raise prices and influence the market. A horizontal demand curve is therefore achieved:

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It is now time to turn our attention to the issue of monopolies. Examples of monopoly include rail transport (i.e. the Channel Tunnel link run by Eurostar) and water supply. Water is a necessity and therefore the water companies have considerable market power. We have stated that price change in perfect competition will not influence the market, however, a monopoly firm is the industry and can only increase sales by reducing prices due to the downward sloping demand curve:


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