"Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly.".
Adam Smith said that competitive forces function like an "invisible hand" to ensure that people pursuing individual interests simultaneously serve interest of society. Competition among economic agents would therefore narrow selfish interest of each person in a sociable desirable direction . Therefore perfect competition would lead allocative or economic efficiency. On the other hand monopolies could lead to lower cost due to economies of scale. Although in the real world it is very difficult (almost impossible) to have a pure perfect competition or monopoly, both of them, in theory, bring benefits to society. In order to evaluate whether perfect competition is a more efficient market structure than monopoly, there has to be a direct comparison between the two market structures to draw conclusions. .
In theory, the existence of positive economic profits in any given industry attracts new firms, therefore the supply increases and the price lowers to the point where normal returns are earned by the representative firm. Perfect competition is a market model. It has various characteristics. The market contains a large number of buyers and sellers. Each buyer and sellers has a perfect knowledge about prices and product. The product being sold is homogeneous; this means that it is not possible to distinguish the product of one firm from that of other firms. There are no barriers to entry into or out of the industry; this means that there is a freedom of entry and exit. All firms are price takers; no single seller has control over the price. .
Industry Demand in Perfect Competition Firm Demand in Perfect Competition.
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The industry demand in perfect competition is a common demand curve, the demand decreases as price increases (Diagram 1). There are many sellers within the market; therefore the effect of one of them would be insignificant.