Monopoly and perfect competition Essay Example for Free

Monopoly and perfect competition Essay Firm under perfect competition and the firm under monopoly are similar as the aim of both the seller is to maximize profit and to minimize loss. The equilibrium position followed by both the monopoly and perfect competition is MR = MC. Despite their similarities, these two forms of market organization differ from each other in respect of price-cost-output. There are many points of difference which are noted below. (1)Perfect competition is the market in which there is a large number of buyers and sellers. The goods sold in this market are identical. A single price prevails in the market. On the other hand monopoly is a type of imperfect market. The number of sellers is one but the number of buyers is many. A monopolist is a price-maker. In fact monopoly is the opposite of perfect competition. Firm under perfect competition and the firm under monopoly are similar as the aim of both the seller is to maximize profit and to minimize loss. The equilibrium position followed by both the monopoly and perfect competition is MR = MC. Despite their similarities, these two forms of market organization differ from each other in respect of price-cost-output. There are many points of difference which are noted below. (2) Under perfect competition there are a large number of buyers and sellers in the market competing with each other. The price fixed by the industry is accepted by all the firms operating in the market. As against this under monopoly, there is only one single seller but a large number of buyers. The distinction between, firm and industry disappears under this type of market situation. (3) The average revenue curves under competition and monopoly take different shapes. The average revenue (price) curve under perfect competition is a horizontal straight line parallel to OX-axis. The industry demand curve or revenue curve slopes downward from left to right. But under monopoly the firm is itself the industry. There is only one demand curve common both to the monopoly firm and monopoly firm and monopoly industry. The average revenue curve under monopoly slopes downward and its corresponding marginal revenue curve lie below the average revenue curve. Under perfect competition MR Curve is the same as AR Curve. (4) Under perfect competition price equals marginal cost at the equilibrium output, but under monopoly equilibrium price is greater than marginal cost. Under perfect competition marginal revenue is the same as average revenue at all levels of output. Thus at the equilibrium position under perfect competition marginal cost not only equals marginal revenue but also average revenue. On the other hand under monopoly both the AR and MR curve slope downward and MR curve lies below AR curve. Thus average revenue is greater than marginal revenue at all levels of output. Hence at the equilibrium output of the monopolist price stands higher than marginal cost. Under competition price MR=MC. In monopoly equilibrium, price MC. (5) A competitive firm makes only normal profit in the long run. As against this a monopolist can make super normal profits even in the long run. In perfectly competitive market there is freedom pf entry and exit. Attracted by the supernormal profit earned by the existing firms the new competitive firms enter the market to compete away the supernormal profit. Output rises and profit becomes minimum. Thus in the long run a competitive firm earns only normal profit. But under monopoly the firm continues earning supernormal profits even in the long run since there are strong barriers to the entry of new firms in the monopolistic industry. (6) Under monopoly price is higher and output smaller than under perfect competition. Price output equilibrium is graphically shown in the diagram given below. AR = MR curve is the demand curve under perfect competition which is horizontal straight line. The downward sloping AR and MR curve are the average revenue and marginal revenue curves under monopoly. At equilibrium point E (MR = MC) a competitive firm produces OM output at OP market price. At point F a monopoly firm attains equilibrium producing OM, output at OP, price. OP competitive price is less than OP, (OP OP,) and OM competitive output is greater than OM, output (OM OM,). (7) A monopolist can discriminate prices for his product, a firm working under perfect competition cannot. The monopolist will be increasing his total profit by price discrimination if he find? Elastic ties of demand are different in different markets. As against his a competitive firm cannot change different prices from different buyers since he faces a perfectly elastic demand at the going market price. If he increases a slights rise in price he will lose the sellers and makes loss. Thus a competitive firm cannot discriminate prices which a monopolist can do. The arguments against monopolies. A Incentives 1 There is a separation of service and payment. Because monopolies are funded through taxation, they cannot go bankrupt they can always get more funding from the public coffers. Therefore, monopolies have little incentive to be efficient. 2 Monopoly by definition means no competition. So, unsatisfied customers have nowhere else to take their business. Monopolies can treat their customers like scum and not lose any business. Again, they have little incentive for efficiency. 3 The actual incentives of monopolies are completely backwards compared with market incentives. On the market, efficient use of resources is rewarded with profits and inefficiency is punished with losses. But monopolies that do good business have their budgets reduced; and those who are inefficient are rewarded with an increased budget. Therefore, monopolies have strong incentives to be inefficient and strong disincentives to be efficient. B Calculation. 1 Because service is separated from payment, monopolies have no profit and loss mechanism. Thus, they have no way to rationally allocate resources. 2 Markets, on the other hand, do operate on the profit and loss system, and can rationally allocate resources. C Morality 1 Monopolies must be enforced through initiatory violence. D Inconsistency 1 What justification is there for group X to have a monopoly? Why not group Y? 2 What is the logical conclusion? Do we monopolize everything, or nothing? What justification is there for some monopoly and some competition?