Lesson 5.2: Perfect Competition vs Monopoly
Perfect Competition
In a perfectly competitive market:
- There are many small firms
- Products are identical
- Firms are price takers
- There is free entry and exit
Efficiency Outcomes:
- Allocative efficiency: Price = Marginal Cost
- Productive efficiency: Firms produce at lowest ATC in long run
Graph: Horizontal demand curve for firms; P = MR = MC at equilibrium
Monopoly
In a monopoly:
- One firm controls the entire market
- The product is unique (no substitutes)
- There are high barriers to entry
- The firm is a price maker
Inefficiency:
- Price > Marginal Cost → deadweight loss
- Underproduction compared to competitive outcome
Graph: Downward-sloping market demand; MR lies below demand curve; Profit-maximizing output where MR = MC, price set above it
Consumer Surplus and Deadweight Loss
- In perfect competition: Maximum consumer surplus, no DWL
- In monopoly: Higher prices and lower output → consumer surplus shrinks and deadweight loss emerges
Key Takeaways
- Perfect competition maximizes social welfare but rarely exists in real life
- Monopolies restrict output to maximize profits, creating inefficiencies
- Regulation may be needed to curb monopolistic power
