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Monopoly v. perfect competition

Monopoly compared with perfect competition

In the discussion that follows, we shall draw extensively upon several concepts that have been introduced earlier; that is, the perfect competition model and the various types of economic efficiency, static, dynamic, productive and allocative. If you are unsure about the meaning of any of these concepts, it would be advisable at this stage to refer to the relevant sections before proceeding.

Consumer and producer sovereignty

Because of the conditions of perfect competition - many buyers and sellers, perfect knowledge and freedom of entry - firms would be forced to produce those goods and services which consumers most wanted. Any firm or even group of firms not behaving in this way would be unable to survive for very long as the competitive pressures from those firms who were responding to consumers' wishes would soon drive them into extinction. From this point of view it could be argued that consumers are sovereign in as much that it is they who 'call all the shots'. However, as described previously, monopoly producers may well decide on which types of goods they are going to supply and at what prices, and then set about manipulating and moulding consumers' tastes, via their marketing activities, to match their pre-determined output plans - a situation in which the producer and not the consumer is sovereign.

Under monopoly price is likely to be higher and output lower as compared with perfect competition.

Figure 1 can be used to predict the effect of a monopoly taking over a perfectly competitive industry, making the assumption that costs would be unchanged in the process of monopolisation.

Figure 1 Perfect competition compared with monopoly

Arm(Dp) is the monopolist's demand curve and the market demand curve under perfect competition. MC is the combined marginal cost curve of all the firms in the perfectly competitive industry. As the competitive firm's marginal cost curve is also its supply curve, this combined marginal cost curve must also represent the industry's supply curve. Equilibrium occurs where demand equals supply, and therefore in perfect competition OPc would be the equilibrium price and OQc the equilibrium output of the industry. If the industry is monopolised and costs are unchanged the monopolist would produce where MC=MR, giving an equilibrium price of OPm, higher than OPc, and an equilibrium quantity of OQm, lower than OQc.

However, if monopolisation of a perfectly competitive industry leads to the reaping of economies of scale, as may well be the case when several small producers are replaced by one large producer, then lower prices and a greater output might result - the opposite of what we originally predicted. In this case, it is possible to predict a social gain from monopolisation. In Figure 1, the gaining of economies of scale is indicated by a downward shift of the marginal cost curve from MC to MC1, and where MC1 intersects with the marginal revenue curve a new and greater equilibrium output is obtained at OQ1, with a price of OP1, which is lower than the perfectly competitive price of OPc. However, the monopolist has still not achieved full allocative efficiency as price is still above marginal cost; neither has it achieved full productive efficiency as it will not be operating on the bottom point of its new average cost curve.

1

Output levels - Monopoly

At which output level in the diagram below will the monopolist produce to ensure productive efficiency?

a)
b)
c)
d)
e)
Please select an answerNo, that's not right. Profits are maximised where MC=MR.Yes, that's correct. This is the point where the firm will be productively efficient (minimum of average cost).No, that's not right. This is the point where the firm will be allocatively efficient (MC=price).No, that's not right. This is where total revenue will be maximised (MR=zero).No, that's not right. This is where the firm will make normal profits (AC=AR).
Check your answer

2

Output levels - Monopoly

At which output level in the diagram below will the firm produce to ensure allocative efficiency?

a)
b)
c)
d)
e)
Please select an answerNo, that's not right. Profits are maximised where MC=MR.No, that's not right. This is the point where the firm will be productively efficient (minimum of average cost).Yes, that's correct. This is the point where the firm will be allocatively efficient (MC=price).No, that's not right. This is where total revenue will be maximised (MR=zero).No, that's not right. This is where the firm will make normal profits (AC=AR).
Check your answer

3

Monopolist - productive and allocative efficiency

A monopolist will be productively and allocatively efficient in long run equilibrium.

a)
b)
Yes, that's correct. The statement is false. A monopolist can be either productively OR allocatively efficient, but not both. If they choose to maximise profits, they will be neither.No, that's not right. The statement is false. A monopolist can be either productively OR allocatively efficient, but not both. If they choose to maximise profits, they will be neither.Your answer has been saved.
Check your answer

4

Perfect competition - productive and allocative efficiency

A firm in perfect competition will be both productively and allocatively efficient in long-run equilibrium.

a)
b)
Yes, that's correct. The statement is true. In long-run equilibrium in perfect competition MC=MR=AC=AR and this will ensure both productive and allocative efficiency.No, that's not right. The statement is true. In long-run equilibrium in perfect competition MC=MR=AC=AR and this will ensure both productive and allocative efficiency.Your answer has been saved.
Check your answer