Adam Smith said that competitive forces function like an “invisible hand” to ensure that people pursuing individual interests simultaneously serve interest of society. Competition among economic agents would therefore narrow selfish interest of each person in a sociable desirable direction . Therefore perfect competition would lead allocative or economic efficiency. On the other hand monopolies could lead to lower cost due to economies of scale. Although in the real world it is very difficult (almost impossible) to have a pure perfect competition or monopoly, both of them, in theory, bring benefits to society. In order to evaluate whether perfect competition is a more efficient market structure than monopoly, there has to be a direct comparison between the two market structures to draw conclusions.

In theory, the existence of positive economic profits in any given industry attracts new firms, therefore the supply increases and the price lowers to the point where normal returns are earned by the representative firm. Perfect competition is a market model. It has various character

The industry demand in perfect competition is a common demand curve, the demand decreases as price increases (Diagram 1). There are many sellers within the market; therefore the effect of one of them would be insignificant. The firms in a perfect competition environment are said to be price takers. The demand curve of a perfectly competitive firm is perfectly elastic at the going market price like diagram 2 shows. This means that the seller can sell all their products at the market price without affecting this price.

Monopoly means “single seller”. A pure monopoly exists when there is one seller in the market for any given good or service that has no close substitutes. There also need to be barriers to entry to protect the seller from competition. Like in perfect competition, it is very difficult to find a pure form of monopoly. First of all there is almost always some kind of substitute for any given product. Second a sole supplier may not be a pure monopolist firm if it fears the entry of other firms and so acts cautiously to prevent attracting potential rivals.

Industry Demand in Perfect Competition Firm Demand in Perfect Competition

Some topics in this essay:
Profit Maximization, Supposing Santiago’s, Harvey Leibenstein, Adam Smith, Perfect Competition, MC P>, Moreover Santiago’s, Searcher Graph, perfect competition, ECONOMIC’S ESSAY, marginal cost, perfectly competitive, economies scale, Compared Monopolies, market structure, competition efficient, efficient monopoly, price marginal, perfect competition efficient, demand perfect competition, monopoly market, market equilibrium, perfect competition market, perfectly competitive firms, monopoly market structure,