(a) Outline any two differences between monopoly and perfect competition
(b) State any four entry barriers that can prevent the emergence of competitive firms.
Explanation
(a) The Differences between monopoly and perfect competition are:
(i) Monopoly is a single firm in the industry while perfect competition is made up of many firms in the industry
(ii) Entry is blocked under monopoly while entry is free in perfect competition.
(iii) Different prices rule the market under monopoly while the price is fixed in a perfect competition
(iv) The demand curve under monopoly is downward sloping while that of perfect competition Is perfectly elastic (remains the same at all levels of output).
(v) The products are heterogeneous under monopoly while they are homogeneous in a perfect competition.
(vi) customers are treated differently under monopoly while
(vii) There is perfect knowledge in perfect competition whereas in monopoly knowledge is limited. e.g. price discrimination.
(viii)Transport cost is excluded in the price under perfect competition and included under monopoly.
(ix) Monopoly can make abnormal profits in the short and the long run while perfect competition can make abnormal profit only in the short run.
(b) Barriers that can prevent the emergence of competitive firms
(i) High entry costs: Existing monopolies producing large volume of output may be benefiting from economies of scale. This may mean that new competitors, probably producing low volume of output, would be faced with higher per unit cost and so would not be able to compete effectively In the market.
(ii) Legal monopolies: Created by law e.g. public utilities like the Post office
(iii) Patent and copyrights: Patent on an invention or innovation. A patent confers sole production rights for a given time period on those who have invested in research and development to enable them to earn a return on their investment. A copyright restricts the production of printed or recorded materials in a similar way.
(iv) Ownership of natural resources: Sole owners of natural resources e g OPEC countries and crude oil.
(v) Unfair Competition: Rivals may be eliminated and the entry of new competitors blocked by aggressive tactics. Example price wars
(vi) Possession of a rare skill I knowledge.