monopolies and monopolistic competitions

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1 Discussion Student’s Name: Institutional Affiliation: Course: Instructor: Date:

2 Monopoly vs Monopolistic Competition In a situation where one company is the sole supplier of the market then that is known as Monopoly. On the other hand, in a situation where there is selling of products that are different from one another as goods but not substitutes by one or two companies is known as monopolistic competition. These two cause inefficiencies that have left people complaining. This is as result of some factors such as high prices and excess production by suppliers. First, monopolies charge too high price thereby causing inefficiency in the market (Lumen, 2021). At the same time, economists criticize the fact that monopolies do not supply enough output to be allocatively efficient. This can be illustrated using the benchmark model of perfect competition. The concept of allocative efficiency argues that, when producing the optimal quantity of some output, then the marginal benefit should equal the marginal cost (Lumen, 2021). However, in the case of monopoly, price is always greater that marginal cost at the profit maximizing level of the output. The consumers will therefore suffer, as monopoly will sell a lower quantity in the market at higher price. On the other hand, monopolistic competition at its optimum output, the firm charges prices that exceed the marginal cost (Lumen, 2021). This makes it a source of inefficiency in the market. There is maximization of profits by the monopolistic firm where marginal revenue equals marginal cost. A monopolistic firm charges price that exceed the marginal cost thereby making its demand curve to slope downwards. The monopolistic firm possess market power hence at its profit maximizing level of production there will occur a net loss of consumer and production surplus (Lumen, 2021). In addition, monopolistic competition cause inefficiency in the market due to the excess capacity operation of the firms (Lumen, 2021). The output associated with minimum average cost is more that the firms profit maximizing output. In a perfectly competitive

3 market, all firms will produce to the point demand or price equals the average cost regardless of the market it operates in. However, in monopolistic competition the demand curve slopes downwards. This hence leads to excess capacity in the end, therefore causing inefficiency in the market. Monopolies and monopolist competition are profitable. This is due to the fact that firms maximize profit by producing goods to the point where their marginal cost equals their marginal revenue (Lumen, 2021). Monopolistic markets have large profits because they have relatively low barriers when entering the market compared to other competitors. In addition, they also possess market power thus making them more profitable and able to increase their producer sales. In conclusion, monopoly and monopolistic competitions have really caused inefficiencies in the market but they have also proved to profitable. They therefore play a key role in our markets.

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4 References Lumen (2021). Inefficiency of Monopoly: Macroeconomics. https://courses.lumenlearning.com/wmopen-microeconomics/chapter/the-inefficiency- of-monopoly/ Lumen ( 2021). Monopolistic Competition: Boundless Economics. https://courses.lumenlearning.com/boundless-economics/chapter/monopolistic- competition/

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