Explain the key differences between a perfectly competitive market and of that of a monopoly.

Both models of the different ways markets can be defined are both ends of the spectrum of how markets operate.The key differences between perfectly competitive markets and monopolies are found in the differences in the numbers of firms, price setting power, ease of entrance, level of differentiation and level of economic efficiency.Perfectly competitive markets feature no barriers to entry meaning that firms are free to enter and exit the market. This means many firms output make up the entire industries market and all of their respective output is homogenous- making the demand function horizontal. Firms are unable to excise price setting power as if they were to price higher than their average cost In the long run as they would lose all revenue to their competitors as customers will go to their competitors who offer a cheaper price- deeming them price ‘takers’. In terms of efficiency, It can be said that perfect competition is allocatively efficient, as the price is equal to marginal cost and productively efficient as the firms produce at their minimum cost. Monopolies vastly differ as they have built up monopoly power which enables them to have price-setting power which defines them as ‘price makers’. The building of such monopoly power, which can arise from intellectual property rights or mergers, make high barriers to high entry and exit. They also offer differentiated products which means they face a downward sloping demand function. Monopolies have no incentive to minimise their costs so are not productively efficient. They are also able to extract producer surplus which means they are also not allocatively efficient. 

Answered by Alia M. Economics tutor

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