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Perfect And Monopoly Markets And Their Difference

962 words - 4 pages

CHARACTERISTICS OF PERFECT COMPETITION1.Firms are small and plenty in number: - In perfect competition there are a large number of firms in the market. Each of them is very small as compared to the whole industry. Individually, none of them is even near to fulfilling the demand of the whole industry.2.Homogenous products: - All firms produce/provide identical products/services. Thus it makes no difference to the buyer which seller's product he buys.3.Perfect information: - All sellers and buyers know the prices at which all the transactions take place and what the possible alternatives are. Information costs are zero.4.Demand is perfectly elastic and the firm is price taker: - Since the companies individually produce a very small percentage of the total industry output, they have no influence on the market price. They can only accept the prevailing market price. Figure A below shows the firm as a price-taker and fig B shows the demand and supply of the industry.Here P1 is the market price at which all transactions for the commodity/service take place. The demand curve for individual firms is perfectly elastic. At market price the firm can sell as much as it produces (q1, q2 or any output). But if the firm charges a rate higher than the market price its customers will shift to competitor's product and the firm will sell nothing. If the firm charges a price below P1 its price will not cover its costs and will thus incur losses.5.No barriers to entry: - There are no barriers for entry to the industry. Any firm can enter the market and the present sellers can't stop that firm from entering.6.No supernormal profits: - In long run no firm can earn supernormal profit as illustrated in figure B below.If a firm is making supernormal profit then new firms will enter the industry or the existing firms would increase their output or both, and the industry supply curve (in fig A below) will start shifting to the right and price starts falling. Supply curve will continue to shift to the right unless the prices have fallen to the point where the demand curve touches the bottom of the average cost curve.7.No economies of scale: - None of the sellers can obtain economies of scale.8.Mobility of resources: - There is no hindrance to movement of resources out from/in to the industry. No cost is incurred on transactions of resources from one application to other.9.No advertising: - No competitive edge can be gained by advertising as the products of various sellers are indistinguishable.CHARACTERISTICS OF MONOPOLY1.Only one firm: - There is only one firm in the market. It produces enough to meet the demand of the whole industry. Demand curve for the industry is same as that of the firm.2.Economies of scale: - Since one firm fulfills the demand of the whole industry it often attains economy of scale.3.Demand is inelastic: - Since there is only...

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