One of the very important Perfect and Imperfect markets namely Perfect competition and Monopoly has always been studied in every foundation course of Economics. These are the distinguishing features of both the markets.
Perfectly Competitive Market – Perfect competition – Many sellers and many buyers
Imperfect Market – Monopolist – Single Seller and many buyers
- Free Entry or Barriers
- Unique Product or Product Homogeneity
- Price taker and Price maker
- High Market Share or Highly Competitive Market
- Common point of Profit Maximization
- Demand Curves of P.C and Monopoly
- Supply Curves and Output Points
- Profit Gains and Profit Loss
- Shut Down Point
- Input Price during Production
- Dead Weight Loss /Social Costs
Free Entry or Barriers
One of the important assumptions of Perfect competition is Free entry and Exit. In other words, it means that there are no special costs associated with entering or exiting the market. As a consequence buyers can also shift from one supplier to another and suppliers too can easily enter or leave the market in case if they are making no profit.
Monopolist, the complete opposite is an imperfect market that produces a unique product and is the sole seller of that particular product. It has barriers to entry in the form is Patents, licences or copyrights etc that halts other companies to enter in the same market for profits.
Unique Product or Product Homogeneity
Monopolists being the single seller of a product, enables them to have monopoly power because first it doesn’t lets anyone else product the product through barriers to entry and secondly, Uniqueness make it charge more from it customers.
Whereas, perfectly competitive markets has Product homogeneity as one of its core assumptions. Each firm produces the same product as the other which means that Firm A cannot afford to charge high because firm B is producing the same product.
Price taker and Price maker
Perfectly competitive firms are always considered to be Price takers because they have a little share in the market and thus cannot effect the market even if it does changes it price. Rather it will lose its own customers if it does so. Hence, market price is given to them.
Monopolist, having a market power enables it to charge its product higher and has it own ways to measure the optimum point of producing and charging its product.
Perfectly competitive Market is highly concentrated due to which the firm faces a perfect elastic demand curve. Meaning that the percentage decline in quantity demanded is greater than the percentage increase in price.
Monopolists are never worried in this regard. They are more concerned about the market share of their Product. The more monopoly power, the higher the market share. Note that high market share doesn’t mean it is having high profits. There are valid cases that monopolist has high market shares but earning a lower profit because of having High Average Costs.
Common point of Profit Maximization
The common feature of both of the markets is there Profit Maximization point which is Marginal Revenue = Marginal Cost. In case if any of these markets movie from this point will either lose profit or increase its costs and would eventually reach to this point to equalize.
Demand Curves of P.C and Monopoly
The Demand Curve of a Perfectly Competitive firm is Perfectly Elastic (Horizontal line) and its market demand curve is downward sleeping. This means that no matter how much the output is produced, it will have no effect on the Price given by the market. Because the market price is determined by the industry demand and supply curve. Moreover, the Demand curve of the Perfectly competitive market is also the Average Revenue, Marginal Revenue and Price of its Product.
Monopoly’s Average Revenue curve is itself its Demand Curve. Thus , its demand curve is the market demand curve and it is downward sloping. For a monopolist, its Marginal Revenue curve is lower than the Demand (AR) Curve because to increase production, monopolist has to lower its price and thus every additional revenue is lower than the last one because of lower prices.
Supply Curves and Output Points
Perfectly Competitive Firm has its own Long run and short run supply curves. In a Short-run Supply curve the Marginal Cost > than Average Variable Cost. However in the long run supply curve chooses its output at a point where Price = Long-run marginal cost. Whatever the case may be, Output is chosen at a point where P=MC and the Lerner’s Index = O.
A monopolist has no Supply curve and charges its price where Price > Marginal Cost. Also, monopolist’s output decision is not only based on Marginal Cost but also on the shape of a demand curve. So shifts in the demand can lead to either changes or no changes in output, price or changes in both. Also, monopolist’s Lerner’s Index is greater than O.
Profit Gains and Profit Loss
Perfectly competitive markets have Zero economic profit or a normal return of investment i.e; competitive . A state of neither gain nor loss. Also no firms can enter in the long run as all are earning zero profit.
Monopolist gains profit because it charges high (Price>Marginal Cost). It will lose its profits if its lose its market share.
Shut Down Point
Monopolist is never worried about shutting down rather they are more concerned about the Market share and producing at its profit-maximizing point. What they fear is the aggressiveness of new competitors that might enter the market and attract the customers. So market share is market power for a monopolist. If it loses market shares – it loses market power and is thus will not able to charge higher.
Perfectly competitive firms has two cases, it can either temporarily shut down or continue producing at a loss. The shut – down point is the point where Price of the Product < Average Variable Cost. Thus, if the per product cost of producing every unit is higher than the price you are selling it , the firm has no choice but to shut down the firm.
Input Price during Production
Monopolist buys its input just like a competitive firm buys its own units. Thus, there are no special input prices for monopolist and its buy in the same market like any other firm of any other market.
With regard to Perfect Competition, the long-run supply curve depends on the extent to which increases and decrease in industry output affect the prices that firms must pay for input into the production process. In this analysis, there are 3 types of industries.
Constant Cost Industry
Long-Run Supply curve is upward sloping -When Demand Increases, prices Rise, Quantity Increases–> new firms entry causes an increase in supply- With no effect on input prices , firms entry occurs until it reaches back to its original price.
Increasing cost industry
Long run Supply curve is Horizontal- When demand increases, Price Rise , Quantity Increases– With an effect on input price (prices rise), the long run Price would be higher than the initial equilibrium.
Decreasing cost Industry
Long Run Supply curve is downward sloping and Vice versa case of Increasing Cost of Industry.
Dead Weight Loss /Social Costs
Since perfect competition produces at a point where Price = Marginal Cost. It has no dead weight loss and at this point the product is efficiently produced.
However, as we know that monopolists charges high having P>MC so instead of producers it will be the consumer who will lose consumer surplus as well as a deadweight loss in the society.