How does monopoly compare with pure competition in terms of price output and efficiency?
Answer:
Monopolies, compared to a pure competition markets, are inefficient to the use of scarce resources. The price of monopoly goods tend to be higher than if it were a pure competition market.
In a competitive market, the price of good is determined by the supply and demand curves but in a monopoly market the price is determined by marginal cost and marginal revenue.
It's kind of hard to describe without diagrams so enjoy
pure competition and monopolies are polar opposites. monopoly has one single supplier, while in pure competition market there would be many (with no barriers to entry for new entrants).
prices and output are determined by the interaction of supply and demand. firms can choose to sell goods at any point on the demand curve, however (in a rational market) they will try to supply to maximise their profits.
in a pure competition market, suppliers are competing against each other on price. this is a simplified economic view of things, as in reality there are no pure competitive markets and most firms want to differentiate products (use marketing, advertising and branding) and not compete on price. none the less in this analysis, as long as the following trade-off holds true firms will increase output: a discount in price leads to enough increased sales to increase total profit. the only way to achieve this, is to produce things at a lower per unit cost than the competitor. therefore, in a pure competitive market prices decrease and output increases over time, with an increase in efficiency as firms try to reduce per unit costs.
in a monopolistic market, the overall goal is still the same: maximise profit, however there are no pressures to reduce prices or per unit costs. therefore, in a monopolistic marker output usually stays flat, prices increase as the firm can maximise profits without reducing per unit costs.
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