How does perfect competition affect consumer surplus compared to a monopoly assuming identical costs? | Fiveable (2024)

FAQs

How does perfect competition affect consumer surplus compared to a monopoly assuming identical costs? | Fiveable? ›

In a perfectly competitive market, firms are both allocatively and productively efficient. One of the ways this is shown is when perfectly competitive firms maximize consumer and producer surplus. Monopolies, on the other hand, are not allocatively and productively efficient because they overcharge and underproduce.

– In a monopoly, consumer surplus is always lower (relative to perfect competition). – But it could be that the increase in the firm's profit more than offsets the decrease in consumer surplus.

In conclusion, perfect competition maximises both consumer and producer surplus by ensuring the most efficient allocation of resources. It leads to the lowest possible prices for consumers and the highest possible prices for producers, thereby maximising the benefits for both parties.

Monopolies earn positive economic profit by transferring some or all of consumer surplus into producer surplus. In a perfectly competitive market economic profits are 0, output is maximized, and price is the lowest. Thus, a perfectly competitive market will have the larger consumer surplus of any monopoly.

Perfect competition contributes to higher social welfare by maximizing the combined consumer and producer surplus. The efficient allocation of resources, driven by competition, leads to lower prices for consumers and optimal production levels for producers.

Perfect competition typically has low or no entry barriers, allowing new firms to enter the market easily. Monopoly, however, maintains high entry barriers, making it difficult for new competitors to enter and challenge the dominant firm.

In a monopoly, these competitive pressures are absent. A firm is able to earn positive economic profits, and because they are a monopoly, other firms are unable to enter their market and drive down price. This leads to an increase in the size of the producer surplus and a decrease in the size of the consumer surplus.

◆ Consumer surplus is the area below the. demand curve and above the market price. ●A lower market price will increase consumer. ●A lower market price will increase consumer. surplus.

One notable feature of perfect competition is low profit margins. Since all consumers have access to the same products, they naturally gravitate towards the lowest prices. Firms cannot set themselves apart by charging a premium for higher-quality products and services.

The four basic assumptions of perfect competition are: 1) large number of buyers and sellers, 2) hom*ogeneous products, 3) perfect information, and 4) free entry and exit.

How does a perfectly competitive market compare to a monopoly market with the same costs? ›

As compared to a perfectly competitive market, a monopolist produces a smaller quantity and sells it at a higher price.

the monopoly's output is smaller, and its price is higher than the perfectly competitive industry's price and output. In a perfectly competitive industry, the demand and price equal marginal revenue. On the contrary, in a single-price monopoly, the price is higher than the marginal revenue.

How does a monopoly differ from a perfectly competitive industry with the same costs? The monopoly produces a smaller quantity. maximize profit by producing the quantity at which marginal revenue equals marginal cost.

Consumer surplus will increase as the price gets lower (assuming sellers are willing to supply at the level on the demand curve) and producer surplus will increase as the prices gets higher (assuming buyers are willing to purchase the added amount as you move up the supply curve).

It is measured by the area under the demand curve and above the price of the good over the range of output produced. If the industry were competitive, consumer surplus would be the area below the demand curve and above P _cC. With monopoly, consumer surplus would be the area below the demand curve and above P _mR.

Perfect competition provides an equal level for all firms involved in the industry. Each firm has all of the knowledge pertaining to the goods, which prevents a monopoly, and each firm is free to enter and leave without any barriers.

In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services. A perfectly competitive market is composed of many firms, where no one firm has market control. In the real world, no market is purely monopolistic or perfectly competitive.

Compared to an efficiently perfectly competitive industry, a monopolist will produce less output and charge a higher price. A monopolist is a single seller in the market, and thus has full control over the market. A monopolist can easily reduce its output and raise the prices in order to earn super-normal profits.

In perfect competition, all producers make and buyers seek the same product—or close substitutes. In a monopoly, buyers lack easy substitutes. Variety, though, allows for substitution across types. For example, the market for tomatoes involves more than simply matching buyers and sellers of an idealized tomato.