Characteristics, Price, Output, and lastly Productive and Allocatively Efficiency
The world is flooded with several industries: Pure Competition, Monopolistic Competition, Oligopoly and Pure Monopoly, which has differentiating characteristics; however, the main focuses during Microeconomics was the comparison and contrast of Pure Competition and Pure Monopoly. Some of these unique characteristics identify why monopolist earns economic profits, why the demand curves are different in relation to price, and lastly, why productive efficiency and allocative efficiency is satisfied with pure competition and not pure monopoly (McConnell).
Pure Competition versus Monopoly characteristics In a pure competitive industry there are thousands of sellers of a standardized product. Since the market is heavily populated these suppliers must be “Price takers” (McConnell). This means firm produces as much or little as at the market price. This industry will never experience economic profits, because others will enter market and bring surplus back to normal profits (Kasper, McConnell). For that, this industry is easy to enter and exit. In comparison, monopolies are a single seller, sole producer, because of a unique product (McConnell). This industry controls the price due to that, producers can make it hard for potential competition to enter, which is called a blocked entry (McConnell).
Monopoly: Major Barriers and Economic Profits Monopolist use barriers as a factor that keeps potential competition from entering an industry, some examples are: legal barriers, pricing and economics of scale (Stigler, McConnell). First, legal barriers are patents and licenses typically used by pharmaceutical companies and electronics (Stigler, McConnell). Secondly, ownership of Essential Resources, this is when a country or region has a comparative advantage of producing goods an example is oil in the Middle East or coal in America (Stigler, McConnell). Lastly, pricing, industries can decrease there price so much so competitors will not be survive; therefore cannot compete (Stigler, McConnell). But, a monopolist will still achieve economic profits because entry does not exist so prices do not decrease (McConnell).
Demand curve: Purely Competitive versus Monopoly in regards to pricing and output
A purely competitive firm demand curve is perfectly elastic because demand equals Marginal Revenue which equals Average Revenue which equals price. In the long run firms will make Normal profits; however, in the short run firms are entering and exiting the industry which causes economic profits for a while (Kasper, McConnell). When the industry began making economic profits the industry becomes more attractive so new firms will enter causing supply to increase and prices to decrease (Stigler, McConnell). If firms are making a loss then firms will leave the industry causing price to rise.
Monopolistic firms are price makers whom set prices in elastic region of the downward sloping demand curve (McConnell). Marginal revenue is less than price to charge higher prices to suppliers, which cause them to produce less supply and earn economic profits (Pettinger, McConnell).
Productive Efficiency and Allocative Efficiency: Pure Competition versus monopoly
Productive efficiency is producing goods and services for the lowest cost whereas allocative…