Characteristics of Perfect Competition and Monopoly Market

Running head: ECONOMICS FOR MANAGERS
Economics for Managers
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1ECONOMICS FOR MANAGERS
Answer 1
Characteristics of perfect competition and monopoly market
Perfect competition refers to a market having a large group of buyers and sellers
selling homogenous or identical product in the market. Monopoly in contrast refers to a
market where a single seller in the market sells a unique product to numerous buyers. The
two market differs in terms of number of buyers and sellers, nature of produce sold and other
characteristics. The distinguishing features of perfect competition and monopoly market are
evaluated below.
Number of buyers and sellers
The perfect competition is characterized as having a large group of buyers and sellers.
As there are various sellers in the market, each seller constitutes only a small part of the
market and hence, has no market power (Baumol & Blinder, 2015).
Monopoly on the other hand is characterized to have a single seller and various
buyers. Only one seller controls the entire market and has considerable market power.
Nature of the product
Under perfect competition, firms sell homogenous or identical product. If one seller
increase price, then buyers can go to other seller as goods are perfect substitutes.
In contrast, product sold by the monopolist has no close substitutes (Mahanty, 2014).
This further increase monopoly power of the seller.
Price determination

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With large group of buyers and sellers under perfect competition, neither buyers nor
the sellers can influence price. Buyers and sellers have to accept the price determined by the
independent forces of demand and supply. Sellers in the market are price takers.
The monopolist has considerable market power and hence, determines price of own
product in the market (Nicholson & Snyder, 2014). The single seller in the monopoly market
is the price maker.
Entry barriers
Firms under perfect competition face no forms of barriers to enter or exit the market.
During economic profits, new firms enter the market while in times of economic loss,
existing firms leave the industry.
Opposite is the case for monopoly. New firms face strict entry barriers to enter the
market. Either natural or regulatory barriers prevent entry of new firms.
Short run and long run profit loss under monopoly and perfect competition
Short run
Under perfect competition, each firm faces a perfectly elastic demand curve. The
demand curve is shown the horizontal line parallel to quantity axis. As firms in perfect
competition act as price takers, marginal revenue is same as average revenue which is same
as price. Firms maximizes profit where firms earn marginal revenue equivalent to marginal
cost in the production process (Cowen & Tabarrok, 2015). In the perfect competition, as
marginal revenue is same as price, the profit maximization condition becomes price =
marginal cost. In order to ensure equilibrium at this point, it is necessary that marginal cost
curve passes through marginal revenue curve from the below. In a perfectly competitive

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market, firms in the short run can earn more than normal profit or suffer from an economic
loss or acquire just normal profit.
Figure 1: Competitive firms earning more than normal profit
Figure 2: Competitive firms earning just normal profit