Monopoly – Term Paper Example
Running Head: MONOPOLY AND PERFECT COMPETITION MONOPOLY AND PERFECT COMPETITION By City, State
Monopoly and Perfect Competition
According to the principles and assumptions of perfect competition, supernormal profits are realized only during the short run because of two key factors. The first factor is perfect information, which is knowledge of the enterprise and its position within the respective industry in relation to competitors. The second factor is the freedom of businesses to enter and leave the industry at will (Jain and Sandhu, 2011, p. 316). As a result, if an organization can record supernormal returns, rival firms will know it because of the lack of limitations to entry. Rival firms are able to enter the industry until product prices drop. Businesses will keep on entering the market and product or service prices will keep on falling until normal profits are realized. The realization of normal profits often occurs in the long run. The presence of many rivals is what makes it hard for the first firm to realize supernormal profits again (Jain and Sandhu, 2011, p. 316). In figure 1, the first firm is represented in the first diagram with the product price represented by Pe. Changes in competitor frequency in an industry are depicted in the second diagram, with demand decreasing with increase in supply; an inverse relationship that causes normal profits.
Figure 1: Normal profits are realized in the long run in a perfect competition
At the same time, many markets lack the traits of perfect competition and the will to enter or leave an industry. Industries with some levels of limitations to entry or exit bring about monopoly markets. For instance, sunken expenses often discourage entry into such industries. As a result, even if businesses in these industries regularly record supernormal profits, new companies might not be capable of entering and competition with them. According to the principles and assumptions of a monopoly market, a monopoly is shielded from competition despite many new firms showing interest in entering the industry (Jain and Sandhu, 2011, p. 316). In figure 2, the monopoly enjoys supernormal profits between AC and P with a steady output, which represent both short and long run periods respectively.
Figure 2: A monopoly market showing supernormal profits in the long and short run
Jain, TR and Sandhu, AS 2011, Microeconomics, Los Angeles, CA: FK Publications