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Advantages and disadvantages of monopoly compared to perfect competition

Mariana calle, laura gil, rafaela lizier, maria pia lopez, alessandra rey, alexia risso
by

Laura Gil :)

on 27 June 2013

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Transcript of Advantages and disadvantages of monopoly compared to perfect competition

Disadvantages
Advantages
Conclusion
Perfectly competitive market better for consumers:
Firm not powerful enough to abuse of consumer
Market mechanism sets price
Consumer can choose what product to purchase (variety)
No barriers to entry allow new firms, more options for consumers and encourages improvement of quality and competitive prices.

Monopoly better for firm:
No competition
High barriers of entry: company does not feel threatened + abnormal profit in LR
Only option in market - profit
Advantages and disadvantages of monopoly compared to perfect competition
Price stability
Producers happily set their prices
Products tend to be inelastic
Low or no level of competition
Brings trust to both consumers and “banks”
Easy for “monopolistic firms” to keep growing
High price and high profits
Productively and allocatively inefficient
Allocatively inefficient
Economies of scale
Levels of investment
Barriers to entry
Anti competitive
High price:
Prices are set by the firm, not by market mechanism
Not many firms, so no "price-wars"
Firm is a price maker: big enough to set prices
High profit
Disadvantage for society
Earn massive abnormal profit in LR
Absence of competitors
High barriers of entry
Perfect competition can only earn normal profit in the LR
Perfect knowledge
Low barriers of entry
Unfair for society
Concentration of income
Price Discrimination
Charge different prices on the same products for different consumers
If consumer is able to pay more, producer will charge higher value than what they'd charge someone who can't afford it

In Perfect Competition:
Perfectly elastic demand
Not price discriminators
Productively inefficient
Producing at its lowest possible cost
Combined resources effectively
MC=AC.
Monopoly productively inefficient:
MC is not equal to AC
Not the lowest point on the AC curve, not profit maximizing level
Cost are minimized

Perfect Competition is productive efficient:
Firm produces at lowest point in AC curve
Achieves normal profit in LR (no entry barriers)
When are firms allocatively efficy?

Perfect competition: try to satisfy demand with limited resources; give best quality at lowest price
Value consumers give it is reflected of price
MC: what it costs for society to produce an extra unit
AR = MC

Monopoly:
Price: greater or lower than MC
AR does not equal MC

Only producer in industry, no "price wars"
Stops competitive behaviour
No competition allows low quality products. Dissatisfied consumers.
No innovation and little improvement upon products.
Consumers exploited
Typical in monopolies:
High quality of goods at the lowest price possible
Consumer satisfaction
Innovation and improvement encouraged
Increases Demand
Maximizes profit
In Perfect Competition:
Sources:
http://knownai.hubpages.com/hub/Advantages-And-Disadvantages-Of-A-Monopoly-Market
http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/inefficiencies-monopolies.asp
http://www.economicshelp.org/microessays/markets/monopoly-diagram.html
http://www.economicsonline.co.uk/Business_economics/Monopoly.html
http://www.dineshbakshi.com/igcse-gcse-economics/private-firm-as-producer-and-employer/revision-notes/1306-monopoly
In Monopolies:
Achieve large economies of scale due to size
Bigger industry - greater gain of economies of scale
Mariana Calle, Laura Gil, Rafaela Lizier, María Pía López, Alessandra Rey, Alexia Risso
Perfect Competition:

Doesn’t have economies of scale
Firm is small - produce small quantity at high cost
Perfect competition: equilibrium is were D=S
Monopoly: produce were MC=MR

As the firm grows, economies of scale make marginal cost decrease; MC curve goes down, producing at a lower cost and higher output
Can obtain high level of investment in both research and development.
Able to invest those “extra profits” in development of the firm.
Both producers and consumers benefit from LR (from research and development)
Efficiency increases
Better products
More choice
Monopolies:
Perfect Competition
Less likely to invest
Small, compared to monopolies

Monopoly:
Able to prevent firms from entering the market so it can be its only producer
Economies of Scale:
Economies of scale: when firms gain average cost advantages.
A monopoly will experience this when it's large.
New firms won't have them
Start being small
No experience, research, development (improvement)
Cannot compete with monopolies
Lower price to reach normal profit, new firms will make losses (AC higher)
. Natural Monopoly: economies of scale can only support one firm
D1 - demand of monopoly
The LRAC curve’s position and shape is determined by economies of scale the firm has
Abnormal profit when output is mafe between Q1 and Q2 (AR>AC)
D2 - demand if another firm enters
Impossible to make abnormal profit (AC > AR)
Will have to gain abnormal profit
Legal barriers:
Firm may have legal right to be the only producer in the industry.
Obtained by: Patents (set period of time, encourages research and development, i.e.: Motorola), intellectual property (pharmaceuticals).
Brand loyalty:
Gained when consumers think of the product as the brand.
Achieved through advertisement and experience
Anti-competitive behaviour:
A monopoly may wish to assume restrictive practices in order to stop competition; this may be legal or illegal (i.e.: "price wars").
Knowing of this policy could already stop firms from attempting to enter an industry.
High start-up cost
International Trade Restrictions (problem to enter if domestic market is protected)
Sunk costs (cannot be recovered)
Sources:
Economics Course Companion - Jocelyn Blink, Ian Dorton
http://www.jstor.org/stable/1802497
http://www.tutor2u.net/economics/content/topics/monopoly/barriers_to_entry.htm
http://www.economicsonline.co.uk/Business_economics/Perfect_competition.html
Perfect competition:
Little or no barriers to entry as there is perfect knowledge
Full transcript