What is the difference between a perfectly competitive market and a monopoly market

A perfectly competitive market is one which follows these certain rules: large number of buyers and sellers, homogenous products (which means that they are all the same therefore has little to zero differentiation between two products), the size of each firm is small leading to no price setting ability, firms are price takers, they have a perfectly horizontal marginal cost curve and average cost curve, no barriers to entry meaning new firms can enter the market with no up front cost, perfect information (so all consumers know the prices of other firms without costing them any extra money), perfect mobility of labour allowing workers or machinery to be used for other uses and lastly no externalities arise from the production of the good. Externalities are spill over effects on third parties that can be positive in the form of cheaper prices or negative in the form of pollution or added costs like tax on cigarettes effecting the average consumer.
Monopoly on the other hand is the opposite therefore it has in its perfect form one firm in the market or by legal terms over 25% of the total market. It is able to make supernormal profit by restricting output unlike a in perfect competition (because monopoly firms are price setters which is profit above the minimum required to keep the firm running. This is because they are profit maximising. large amounts of economies of scale through bulk buying for example, they are less efficient in terms of productive and allocative due to less pressure on prices in relation to costs. However, they are dynamically efficient as they can use supernormal profit to invest in innovation unlike firms in perfect competition. This is an example of why they have high barriers to entry in a monopoly market as they have natural barriers to entry through economies of scale but also artificial through advertising or research and development.

Answered by Matthew L. Economics tutor

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