Monopoly vs. Perfect Competition: Key Differences

Posted on Apr 6, 2025 in Economy

Formulas:

CMEV = CV / Q; CMET = TC / Q; MC = CT1 – CT0; CT = CV + CF

6 Elements to Differentiate a Product:

  • Brand
  • Local geographic location
  • Package
  • Attention (Courtesy)
  • Credit
  • After-sales care
  • Warranty

For Existing Monopoly Firms:

Monopolistic companies already exist due to the following barriers:

  • Economies of Scale: Better use of production factors, capital goods, human resources, and entrepreneurial ability. This tends to lower unit costs or average costs (a technological advantage).
  • Natural Monopolies: Companies regulated by the government to prevent consumer abuse by setting prices.
  • Patents: Granted by the government to encourage research.
  • Ownership of key production factors.

These barriers impede the entry of other firms into the monopolistic structure.

The best use of economies of scale is arguably the most important barrier.

Comparison to a Company in Perfect Competition:

A monopoly trades a product that is not easily substituted and has “economic policies,” meaning if they want to sell more, they lower the price.

A monopoly leads the market but uses advertising as a corporate fashion and perceives pure or economic profit.

Characteristics of a Firm in a Perfectly Competitive Market:

  • The price is determined by the industry, i.e., by all consumers and businesses.
  • The price is a given for the company and cannot be changed.
  • There is perfect mobility of factors given the transparency; there is perfect information.
  • The median income is equal to the price, equal to the demand curve.
  • Operates in the short and long term.
  • There are diminishing returns (combination of fixed factors with variable factors).
  • A long-term gain of normal units (only covers fixed and variable costs).

Concepts:

  • Marginal Cost: The extra cost for producing one more unit of product, mathematically corresponding to the difference in total costs.
  • Diminishing Returns: Refers to the combination of a fixed factor of production and variable factors. For example, in a company, there are more workers than marginal product, which has tripled, leading to increasing costs.
  • Economies of Scale: A technological barrier for monopolies where the company seeks the efficient use of production factors, showing a total average cost decrease.
  • Long Term: A term used in economics or business to break even or maximize profits (variables, free entrance and exit of firms in the industry, economies of scale).
  • Short Term: (fixed factors/variables, diminishing returns occur, the number of firms is fixed).
  • Cartel: An oligopoly form of association where a group of companies with similar features formally collude and handle the market price.
  • Normal Utility: This utility occurs when total revenue equals total cost and is only used to pay fixed and variable costs, allowing the company to stay in business.

Perfect Competition:

  • The market price cannot be altered by many buyers and/or sellers.
  • The product is homogeneous or standard (no difference in products/perfect substitutes).
  • There is transparency in the market (perfect information).
  • There is perfect mobility of factors: Ī£Empresas = Industry.
    • ITOTAL / Imarg: The company will close when the loss exceeds the fixed cost.
    • Imarg: Additional revenue a firm receives when it sells an additional unit.
    • The company will produce all the units in which CMAG <>
  • Offering Table: Varying amounts produced by a company at various prices in a given period.