Monopoly and Perfect Competition

Monopoly and Perfect Competition

The 15 markers
7) Definitions

* Monopoly= officially, a monopoly is market where 1 firm has 100% market share. In real terms however it occurs when there is a firm in a market which controls the vast majority of the market share. The competition commission defines a monopoly as being a single producer that controls 25% or more of a market. A monopoly will generally be a price maker and will price above the market equilibrium and may also restrict output.
* Perfect competition= a market structure where there are so many buyers and sellers, that no consumer can buy or sell at any other price other than the price determined by the market equilibrium. There are no barriers to entry or exit of this market and homogeny of produce also exists, amongst other factors.

Diagram- monopoly Diagram- perfect competition


The Marginal revenue curve represents the degree of control a firm has upon a market. In a perfectly competitive market no firm has market control as there are such a high number of buyers and sellers. In perfect competition homogeny exists as well as perfect information, no barriers to entry/exit and the assumption all firms profit maximise exists. For example if one firm increases price perfect knowledge means all customers will switch to cheaper competitors, as such there is completely elastic demand from consumers. As demand is entirely elastic and the firms involved have no control of the market, every extra unit is sold at P* (at demand) and if p* equates to £5 and an extra unit is sold at £5, the average revenue remains at £5(horizontal). They are horizontal because in perfect competition demand=MR=AR and is horizontal because it is a price taker.
Because a monopoly is a price maker and faces a negatively-sloped demand curve, its marginal revenue curve is also negatively sloped and lies below its average revenue (and demand) curve. A monopoly...

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