Comparison between Monopolistic and Competitive Market

We all know in a monopolistic market, there is only one seller of the resource, and in a competitive market, there are many buyers and sellers. The fundamental difference leads to several key differences in the behaviour of market participants and the outcomes of the market.

In a competitive market, individual firms are price-takers and have no power to influence the market price. In contrast, in a monopolistic market, the monopolist has the power to influence the market price by restricting the supply of the resource. This can lead to a higher market price and lower quantity of the extracted resource compared to a competitive market.

Again, in a competitive market, there is free entry and exit of firms, which ensures that economic profits are zero in the long run. In a monopolistic market, there are barriers to entry that prevent new firms from entering the market, allowing the monopolist to earn economic profits in the long run.

Moreover, in a competitive market, the market price reflects the marginal cost of production, while in a monopolistic market, the market price can be higher than the marginal cost of production due to the monopolist's ability to restrict supply. It can lead to inefficiencies in resource allocation and lower overall economic welfare compared to a competitive market.

Additionally, in a competitive market, the optimal rate of extraction is determined by the intersection of the supply and demand curves, while in a monopolistic market, the optimal rate of extraction is determined by the monopolist's profit-maximizing behaviour. And leads to suboptimal extraction rates and inefficient resource allocation in a monopolistic market.

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