Question

Compare perfect competition and monopoly on the basis of: a. the number of buyers and sellers. b. the market supply curve. c. the nature of the good sold in the market.

Short answer

Perfect competition has many buyers and sellers with identical products, and a perfectly elastic supply curve; monopoly has one seller with unique products, and the supply curve reflects marginal costs.

Step-by-step solution

Number of Buyers and Sellers

In a perfect competition market, there are many buyers and sellers, none of whom have any control over the price of the product. Each seller sells an insignificant portion of the total output. In contrast, a monopoly market has only one seller who dominates the entire supply. Buyers in both markets are numerous and assume no influence over the market price.

Market Supply Curve

In a perfectly competitive market, the supply curve is perfectly elastic, meaning that firms can sell as much as they want at the market price, which is determined by the market demand and supply interaction. Conversely, in a monopoly, the supply curve is essentially the marginal cost curve because the monopolist sets the quantity of supply to maximize profit, typically producing less than what would be produced in a competitive market at a higher price.

Nature of the Good Sold

Goods sold in a perfectly competitive market are homogeneous; buyers perceive no difference between the products of different sellers, which leads to no brand loyalty. In a monopoly, the product is unique with no close substitutes available, enabling the monopolist to exercise significant price-setting power.

Key concepts

Perfect Competition

Perfect competition is a market structure characterized by numerous small firms, each independently operating without affecting the market price. Each seller and buyer must accept the prevailing market price.
In this market, the products offered by various sellers are similar or identical. This characteristic is essential because it means that the products are homogeneous, and consumers do not prefer one seller's product over another's.

• Many Sellers: Each seller has a negligible role in the market.
• Price Takers: Sellers adjust to the market price, which is beyond their control.
• No Entry Barriers: Firms can freely enter or leave the market.

Understanding these traits helps in comprehending why perfect competition leads to efficient resource allocation, where consumer and producer surpluses are maximized.

Monopoly

Monopoly stands on the opposite end of the spectrum from perfect competition. In a monopoly, there is only one seller in the market, which allows this entity to exercise significant control over the price and quantity of goods supplied.
The lack of competition results in the monopolist being the price maker, unlike the price takers in a perfectly competitive market. The barriers to entry for potential competitors are high, often due to:

• Government regulations preventing new entrants.
• The monopolist's ownership of a resource that's crucial to the product's existence.
• High startup costs.

The lack of alternative products ensures that the monopolist can set higher prices, leading to potential inefficiencies in terms of resource allocation.

Market Supply Curve

The market supply curve in different market structures highlights significant contrasts. Under perfect competition, the supply curve is perfectly elastic, indicating that firms can supply any amount at the prevailing market price.
Firms in such markets face a horizontal demand curve, as they are price takers. The market mechanism dictates that the price adjusts to equilibrate supply and demand, ensuring efficient resource distribution.
In contrast, a monopolistic supply curve reflects the firm's marginal cost curve since they set prices to maximize profits. This often results in a lower quantity of goods being supplied at a higher price than in a competitive market. Unlike the perfect competition's elastic supply curve, the monopoly's curve can be steep, reflecting reduced supply at elevated prices.

Number of Buyers and Sellers

The number of buyers and sellers within a market greatly impacts its structure. In perfect competition, numerous sellers and buyers exist, which ensures no single participant can influence the price. Each firm sells a trivial portion of the total supply, fostering negligible market control.
Conversely, a monopoly consists of one seller, controlling the market supply entirely. Despite having many buyers, the lack of alternative sellers gives one entity massive influence over pricing. While buyers are numerous in each market setting, their collective lack of power in price negotiations means they conform to the prices set by market forces or the monopolist in control.
In essence, while the number of buyers remains abundant in both markets, it is the presence or absence of sellers that fundamentally defines the differences and market power dynamics.

Homogeneous Goods

The nature of the goods sold significantly differentiates these market structures. Perfect competition is defined by homogeneous goods, where products are undistinguished across sellers, ensuring that consumers perceive no difference from one seller to another. This lack of differentiation results in fierce price competition among sellers.
In contrast, monopoly markets feature unique goods with no close substitutes, giving the monopolist unparalleled market power. This uniqueness allows the monopolist to charge premium prices, as there are no competitive alternatives for consumers to turn to.
Homogeneous goods in competitive markets mean that competition is driven by price and efficiency, while in monopoly markets, product uniqueness shields against price wars, allowing control over both price and production.