suppose the widget industry is perfectly competitive and faces constant returns to scale.A monopoly purchases all widget producers in the market. List three ways in which the market outcome under monopoly will differ from the market outcome under perfect competition
1) Price: Under perfect competition, the market price is determined by the forces of supply and demand, and all firms in the industry are price takers. However, under monopoly, the monopolistic firm has the power to set the price at a level that maximizes its own profits. This usually results in a higher price for the product compared to what would prevail under perfect competition.
2) Quantity: In a perfectly competitive market, the quantity produced is determined by the intersection of the demand and supply curves. Multiple firms competing against each other strive to produce the optimal level of output to maximize profits. However, under a monopoly, the firm has the ability to restrict the quantity produced in order to maximize its own profits. This often leads to a lower quantity being produced compared to what would be produced under perfect competition.
3) Deadweight Loss: Perfect competition generally results in an efficient allocation of resources, where the total surplus is maximized. However, a monopoly is likely to create a deadweight loss, which represents the loss of economic efficiency due to the monopolistic firm exercising its market power. This occurs because the monopoly restricts output to a level lower than the socially optimal level, leading to a loss in overall welfare in the market.
Under monopoly, the market outcome will differ from perfect competition in the following ways:
1. Price and Output level: In a perfectly competitive market, multiple firms compete, leading to lower prices and higher levels of output due to competition. However, under a monopoly, the single firm has control over the market, allowing them to set higher prices and restrict output to maximize their own profits. As a result, the price of widgets in a monopoly will generally be higher, and the output level will be lower compared to perfect competition.
2. Lack of competition: Perfect competition relies on numerous firms competing with each other, leading to innovation, efficiency, and consumer welfare. In contrast, a monopoly eliminates this competition, resulting in reduced incentives for innovation, fewer choices for consumers, and potentially lower overall welfare in the market. Consumers may have limited options and fewer alternatives, reducing their ability to obtain goods or services at competitive prices.
3. Market power: Monopolies have considerable market power, allowing them to control prices, output, and market conditions. They may restrict supply to drive up prices, leading to potential economic inefficiencies. Additionally, monopolies can engage in predatory practices, such as pricing discrimination or anti-competitive behavior, which can harm consumers and smaller businesses. In contrast, perfect competition ensures that no single firm has significant market power, promoting fairness and competition among all market participants.
Overall, the key differences between monopoly and perfect competition lie in the control over prices, limited competition, and market power, which can result in higher prices, reduced output, and potential negative effects on consumer welfare.
Under perfect competition, there are many firms operating in the market, while under monopoly, there is a single firm dominating the market. Due to this significant difference in market structure, the market outcomes will differ in several ways. Here are three major differences:
1. Production and output level: In perfect competition, firms operate based on market forces, aiming to maximize profit. As a result, firms under perfect competition tend to produce at the efficient scale where average total cost is minimized. On the other hand, under a monopoly, the single firm holds the market power and controls the entire industry. Monopolies are profit-maximizing entities, so they may produce at a level where marginal cost equals marginal revenue, which usually occurs at a lower level of output compared to the perfectly competitive market. This leads to a reduced overall output level in the market under monopoly.
2. Price determination: In a perfectly competitive market, prices are determined by the interaction of market supply and demand forces. Firms are price-takers and have no control over the market price. However, under monopoly, the single firm has market power and can set the price. They can charge a higher price than what would prevail under perfect competition since they face a downward sloping demand curve. This enables monopolies to earn higher profits by charging a price higher than the marginal cost of production.
3. Resource allocation and efficiency: Perfect competition promotes efficiency as it ensures productive resources are allocated to their most valuable use. In this scenario, the market outcome is efficient because the equilibrium price equals marginal cost. However, monopolies may lead to a less efficient allocation of resources due to their ability to restrict output and increase prices. The price charged by monopolies tends to be higher than the marginal cost, resulting in an underallocation of resources and a deadweight loss to society. Additionally, monopolies may not have the same incentives to innovate and improve their products compared to competitive market firms.
To summarize, the main differences between the market outcome under a monopoly and perfect competition include the production level and output, price determination, and resource allocation and efficiency.