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PURE COMPETITION
Pure competition is a market structure that is characterized by many firms producing
identical products, no barriers to entry or exit, prices set by the interaction of supply and demand,
and firms earning only normal profits in the long run. The pure competition concept is a theory
that states that firms in perfectly competitive markets are price takers and that there are no
barriers to entry or exit. The concept is also known as the perfect competition model.
In pure competition, each small firm has essentially the same product offering and is a
price taker. The market price is set by the interaction of market demand and market supply and
each firm simply accepts this price. Since there are many firms in the market, each with only a
small share, no single firm can have any significant impact on price.
Advantages of Pure Competition
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Pure competition can lead to more innovation and creativity as firms attempt to
differentiate themselves from their competitors.
o One of the key advantages of pure competition is that it can lead to more
innovation and creativity. This is because firms are constantly trying to find ways
to differentiate themselves from their competitors. To do this, they need to be
constantly coming up with new ideas and ways of doing things. This can lead to a
more vibrant and creative business environment.
It can provide consumers with more choices and better prices.
o pure competitive market is that there are many small firms, each producing a
relatively small portion of the total output. This decentralized structure allows
firms to be nimble and responsive to changes in consumer demand. Moreover, it
ensures that no single firm can exert too much control over the market.
4 Characteristics of Pure Competition
1. There are many firms in the market producing identical products.
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There are many firms in the market producing identical products in pure
competition. In this type of market, firms compete on price and product quality.
There is little to no differentiation among firms, and customers can easily switch
from one firm to another. Pure competition provides firms with little to no power
in the market, and so they must compete on price and quality to survive.
2. There are no barriers to entry or exit.
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In pure competition there are no barriers to entry or exit which leads to firms in
the industry having to compete on price. This type of market is usually found in
the short run when there are a large number of small firms. In the long run, new
firms can enter the market and existing firms can leave, which leads to a fall in
price and an increase in the number of firms.
3. Prices are set by the interaction of supply and demand in the market.
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When it comes to the price of a good or service, demand refers to the number of
consumers willing to buy a product, while supply represents the amount of the
good or service that is available. In a perfectly competitive market, the market
price is determined by the point where the demand and supply curves intersect.
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Perfect competition results in an efficient allocation of resources. This is because
the market price reflects the true cost of production, and there are no wasted
resources.
4. Firms can earn only normal profits in the long run.
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There are a few things that contribute to this. First, firms in the pure competition
are price takers. This means that they have to accept the market price for their
product, and they cannot influence the price. Second, firms in the pure
competition are prevented from earning economic profits in the long run because
new firms will enter the market if profits are high. This will lead to more
competition, and the profits will be driven down to the point where they are just
enough to cover the firms' costs.
The market price for an industry decline with increasing supply. However, for the
individual firm, demand is perfectly inelastic. This means the firm can supply any amount of
product without affecting the market price. As a result, the firm can maximize profits by supplying
the amount when its marginal cost equals the market price.
Average Revenue = Marginal Revenue = Market Price
Average revenue equals marginal revenue when output is sold at the market price. This
is because the market price is the price at which a good or service is traded in the market. The
market price is the price that a firm receives for its output. The market price is also the price that
a firm must pay for its inputs. Thus, when a firm produces output at the market price, it can cover
its costs and earn a profit.
When the output is sold at the market price, average revenue equals marginal revenue.
This is because the market price covers the firm's costs and leaves a profit.
Revenue = Price × Quantity
In economics, revenue is the income that a firm generates from the sale of goods or
services. It is computed as the product of the price of the good or service and the quantity sold.
In other words, revenue = price × quantity.
MONOPOLY
It is used to describe a market where there is only one firm selling a product or service.
This firm is called a monopolist. A monopoly market structure is characterized by high barriers to
entry, which prevent other firms from entering the market. The monopolist is the only firm in the
market and can therefore set prices. Monopoly can be defined as a market structure in which
there is only one seller of a product or service and that seller has complete control over prices.
Two Types of Monopoly
1. Natural monopoly occurs when it is economically efficient for there to be only one firm
in the market.
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A natural monopoly is a situation in which it is economically efficient for there to
be only one firm in a particular market. This can occur when the firm in question
has a significant cost advantage over its potential rivals, making it the only
producer that can realistically operate in the market.
2. Artificial monopoly occurs when the monopolist has obtained exclusive rights to sell the
product or service, through government regulation or other means.
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In a free market economy, monopoly occurs naturally when a firm becomes the
sole producer of a good or service with no close substitutes. When this happens,
the monopolist will be the only supplier of the good or service and will be able to
set prices at a level that maximizes their profits.
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However, there are also cases where monopoly arises not due to the workings of
the free market, but instead due to government action or other means. This is
what is known as an artificial monopoly.
5 Characteristics of Monopoly
1. A Lack of Substitutes
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One firm producing a good without close substitutes. The product is often unique.
Ex: When Apple started producing the iPad, it arguably had a monopoly over the
tablet market.
2. Barriers to Entry
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There are significant barriers to entry set up by the monopolist. If new firms enter
the industry, the monopolist will not have complete control of the firm on the
supply. These barriers imply that under a monopoly there is no differ­ence
between a firm and an industry.
3. Competition
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There are no close competitors in the market for that product. This leaves the
company with a monopoly on the product, which can be a very profitable position.
However, it is important to remember that a monopoly is not without risk.
4. Price Maker
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The monopolist decides the price of the product since it has market power. This
makes the monopolist a price maker.
5. Profits
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While a monopolist can maintain supernormal profits in the long run, it doesn’t
necessarily make profits. A monopolist can be a loss-making or revenuemaximizing too. This is not possible under perfect competition. If abnormal profits
are available in the long run, other firms will enter the competition with the result
abnormal profits will be eliminated.
Advantages of Monopoly
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Stability of Prices
 In a monopoly market structure, the prices are pretty stable. This is because there
is only one firm involved in the market that sets the prices since there is no
competing product.
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Economies of Scale
 Since there is a single seller in the market, it leads to economies of scale because
of large-scale production which lowers the cost per unit for the seller. The seller
may pass this benefit down to the consumer in terms of a lower price.
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Research and Development
 Since the monopolist is making abnormal or supernormal profits, the firm can
invest that money into research and development. Customers may get better
quality products at reduced prices leading to enhanced consumer surplus and
satisfaction.
Disadvantages of a Monopoly
1. Higher Prices
The monopolist could set a very high price for the product leading to the exploitation of
consumers as they have no option but to buy it from the seller due to the lack of competition in
the market.
2. Price Discrimination
Monopolists can sometimes use price discrimination, where they charge different prices on the
same product for different consumers. This depends on market conditions.
3. Inferior Goods and Services
The lack of competition may cause the monopoly firm to produce inferior goods and services
because they know the goods will sell.
Total revenue is a measure of how much income a company generates. It is calculated by
multiplying the total quantity of goods or services sold by the price per unit. Total revenue is an
important metric for businesses to track, as it can give insights into overall growth and
profitability.
Marginal revenue is the revenue earned by selling one more unit. Average revenue is
total revenue divided by quantity. The marginal revenue curve is the relationship between
marginal revenue and quantity. The average revenue curve is the relationship between
average revenue and quantity. The two curves intersect at the quantity where marginal
revenue equals average revenue. Beyond this point, the marginal revenue curve lies above
the average revenue curve. This is because marginal revenue is always equal to or less than
average revenue. The quantity at which the two curves intersect is the point of optimal
output.