Describe and explain the main differences between Perfect Competition and Monopoly market structure.

Perfect Competition and Monopoly are opposite extremes of market structure. The main starting point for the differences between the two market structures is the ease of entrance and exit to and from the market. In Perfect Competition in the short run, supernormal profits can be made, where the total revenue is greater than the total cost. However, these profits act as incentives to new firms to enter the market where profits can be made. It is because of a complete absence of barriers to entry that these firms can enter the market, and eventually there are many firms in the market, all producing exactly the same good: they are homogeneous. As a result of there being so many firms in the market, along with the assumption that all buyers and sellers in the market have perfect information, these supernormal profits are competed away, as firms have to accept the market-ruling price, making them price takers. If a firm was to try and sell at any price above the market-ruling price, they would not sell any units of output, as buyers have perfect information and goods are homogeneous, and it would make no sense for a firm to sell below the market-ruling price, as this is the price at which all firms are only making normal profits and so a lower price would result in revenue being lost and subnormal profits being made. Due to the pressure of extremely high competition, firms in Perfect Competition have to be efficient and so they will be both allocatively efficient by setting the price equal to the marginal cost, and productively efficient by operating at the minimum point of their average cost function.Whereas there are many firms in Perfect Competition, there is only one firm with one hundred per cent market share in the extreme case of monopoly. This firm can maintain its market share through a number of means, such as entry limit pricing, which is where the Monopolist uses its economies of scale gains to set prices at a low enough level such that it would not possible for other firms to enter the market and make a profit, though the Monopolist’s low level of average costs allows it to maintain a profit. This complete market share allows the Monopolist to be a price setter, in contrast to firms being price takers in Perfect Competition. This price will be at the profit maximising price where marginal revenue is equal to marginal cost. This profit maximising allows the Monopolist to make supernormal profits, which allows for dynamic efficiency, where profits can be reinvested into research and development; this is not possible in Perfect Competition as only normal profits are made in the long run. In contrast to Perfect Competition, the Monopolist does not face competition from other firms and so it does not need to be productively efficient in order to make supernormal profits. Equally, allocative efficiency is not achieved in a Monopoly as the Monopolist can get producer surplus by setting the price higher than marginal cost.