Microeconomic ESSAY PLANS - In depth

Perfect competition consists of a market where products are homogenous therefore there is perfect knowledge within the industry. This means firms are price takers and have no price-setting power. This could include agricultural industries. POINT 1: Productively efficient, PC in the LR benefits from producing where costs are the lowest (MC=AC), given the level of output and technology. Firms use resources in the most efficient way possible. Monopolies do not produce at the lowest cost (due to a lack of competition, there is no incentive to reduce costs) DIAGRAM: PC showing Productively efficient output. EVAL: Monopolies are dynamically efficient whereas PC cannot invest retained profits to R&D, this allows Monopolies to be dynamically efficient. Firms can develop technology which improves the production process (reducing costs) or improves the quality of goods/services. This can be passed to consumers through lower prices or better quality goods. POINT 2: PC benefits from allocative efficiency (where P=MC), this maximises social welfare from consumers and producers. It ensures resources satisfy the highest number of wants in society. Enabling producers to make profits as well as ensuring consumers benefit from low prices. In Monopolies, firms have price setting power hence they influence the industry price leaving consumers with little choice on alternate options. This could reduce consumer surplus and not benefit society. DIAGRAM: Comparison of high monopoly prices and low PC prices. EVAL: However, as monopolies have a large control of the market they can enjoy economies of scale which PC can't benefit from. E.g. Purchasing economies like bulk buying and Technical economies like research and development. Transport costs can also reduce due to containerize. This can allow monopolies to lower LRAC costs.