Posted at 01.02.2019
Amount of revenue for any organization or corporation make depends upon the framework of the marketplace where they operate. Market structure also determines whether the firm earnings will be large, or perhaps enough for this to survive, or so low that it'll be forced out of business, or the price costed to it's customer will be high or low and additional more will the buyer benefit from the decision the organization make (Slomon, 2013). In this article Perfect competition and Monopoly market set ups are analysed to comprehend the nature of any business.
Perfect Competition: "Market Composition where there are extensive organizations; where there is flexibility of entry in to the industry; where all businesses produce the same product; and where all organizations are price takers" (Slomon, 2013).
Monopoly: "Market composition where there is only one firm on the market, and hence no competition from within the industry" (Slomon, 2013)
The major factors deciding the market structure are the number of retailer on the market, product differentiation and admittance & exit obstacles. Perfect competition and Monopoly market constructions are believed as extreme market constructions as compared to the other ones like, oligopoly and monopolistic competition (Kwasnicki, 2000).
In a perfect competition, the number of sellers is many when compared with a monopoly, which consists of a single retailer. Among the major differentiating factors between your two buildings is the access and exit obstacles. In an ideal competition, it is not hard to enter the business enterprise and exit since there are no barriers to either access or exit. This implies that, only if businesses or businesses can notice the chances of incurring a considerable profit in a specific business, they might make an accessibility into it. But for a monopoly there are very high entrance and exit obstacles which prevent other businesses to enter. The obstacles can be like patents, specialized know-how etc. created by existing firms (Sloman, 2013).
In a perfect competition, the similar products are sold by a whole lot of organizations. Hence the products are perfect substitutes. The consumers are aware of the variations in the merchandise if any and the pricing in the various firms. A good example can be Coke or Pepsi. But, in Monopoly the merchandise sold are not perfect substitutes and somewhat are unique.
In a perfect competition the companies have no control over the price. The price depends upon the market. If a company escalates the price of something it will miss out to its competitors who are selling at a comparatively cheap. Hence, the perfect competition firms are called as price takers. On the other hand, monopoly organizations are called as price manufacturers because they choose what prices are their products to be sold. It is because they will be the single sellers on the market (Mankiw, 2011).
In a perfect competition, there are chances to earn excessive profits in the short run. This might not be possible in the long run because with the occurrences of abnormal profits new firms will be joining the market and therefore would reduce or shrink the profits, causing the profits heading down. But for monopoly structure, excessive revenue are possible even over time because of they are just one with their kind and the entry with their market is very hard (Makowski & Ostroy, 2001).
Source: (Mankiw, 2011)
In a perfect competition, the industry is the price maker and the company has to take that price and behave as price taker. This industry involves all the companies providing homogenous products and the price is where the market demand is equal to market source. Every firm has to charge the purchase price chose by the industry (Sloman, 2013).
Perfect Competition in the Short RunPC-short-run. png
Source: (Mankiw, 2011)
In the brief run, the firm can make excellent normal profits because there will be lesser firms competing in the market.
Source: (Morton & Goodman, 2003)
In the long run, when the companies are having abnormal profits, other firms would also get lured to make an entrance into the market and in having less entry and exit barriers, its easier for businesses to get into the markets. This would reduce the selling price and shrink the gains. The resource curve of the industry would get pressed or shifted to the right hand side which will decrease to the stage where all the unusual revenue will be tired (Arnold, 2008).
If any organization is making deficits, it'll leave the market since there are no exit barriers and would transfer the curve left which shall increase the price and cause normal profits for the firms that will work.
Source: (Mankiw, 2011)
Monopolies will have supernormal earnings both in the long as well as brief run, since there is absolutely no competition or substitutes.
A monopolist is price manufacturer and the demand curve is downward sloping in that scenario. The income will be maximum when MC = MR. When the AR is above ATC at the revenue maximising outcome, there shall be supernormal gains. The demand curve of your monopoly is inelastic, the price will be higher which will boost the super normal income (Morton & Goodman, 2003).
[Where, AC = Average Cost; AR = Average Earnings; ATC = Average Total Cost; MC = Marginal Cost and MR = Marginal Revenue]
It is worth studying the above mentioned two acute cases as they provide structure work within which to understand the real world. Some industries tend more competitive to the extreme, thus their performance more towards perfect competition and their products have significantly more substitutes, like cabbage and carrots. Alternatively in monopoly, you can find one dominant organization and a few much smaller firms. So, the company has appreciable control over price, like prescription medications and local drinking water supply company.