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Explain, with relevant economic theory, how the pricing and output decisions between a monopoly firm and a perfectly competitive firm differ because of their differences in barriers to entry. [10]


This paper explains how the pricing and output decisions of a monopoly and a perfectly competitive firm differ due to the differences in the nature of their barriers to entry. What is a monopoly? A monopoly is a market where there is only one seller of a uniquely differentiated product with no close substitutes. What is a perfectly competitive firm? A perfectly competitive firm is one where there are many buyers and sellers of one homogeneous product. What are barriers to entry? Barriers to entry are obstacles or barriers that deter new firms from entering the market. There are two main types of barriers, artificial (man-made barriers) and natural (such as huge economies of scale)

After having defined the various concepts, this essay seeks to first state the assumptions of each firm before illustrating with a diagram how each firm's pricing decision is made. It would then show how differences in barriers to entry affect this important pricing decision of a monopoly and perfectly competitive firm.

[Insert an economics diagram on Monopoly]

The assumptions of a monopoly are high barriers to entry which deters firms from entering, highly differentiated product with no close substitutes and a situation where there are many buyers but only one seller who dominate the market. For a monopoly, the profit maximizing point is where MC = MR. This shows how pricing decision is made for a monopoly which aims to maximize profits.

[Insert economics diagram on a Perfectly Competitive firm]

On the other hand, the assumptions of a perfectly competitive firm are low or no barriers to entry, a homogeneous product, many buyers and sellers in the market, as well as perfect information. The profit maximising point for this firm is also where MC = MR. This also shows how the pricing decision is made for a perfectly competitive firm, and it is different from a monopolist's decision because the price is lower and the equilibrium output is higher - that is, P is lower, the Q is higher, compared to a monopoly.

In conclusion, when considering barriers to entry, having established how the pricing decision is made by both a monopoly and a perfectly competitive firm, this distinction helps to explain how the differences in these barriers to entry affect their pricing decisions. It is evident that with high barriers to entry, in the case of a monopoly, the monopoly is a price setter since firms are deterred and prevented from entering the market easily. Conversely, with low barriers to entry, which is in the case of a perfectly competitive firm, such a firm is a price taker since new firms can enter the market very easily, explaining why the firm follows the price set in the market. 

JC Economics Essays – H2 A levels – Economics tutor’s comments: This A level economics essay answers the question of barriers to entry and market structure directly, but a lot more thought is required.

What are the main strengths of this economics essay? Think about it. What are the main weaknesses of this economics essay? Think about this question also. The main good thing about this essay that makes it useful in learning economics is that it addresses the question directly, through the use of relevant, clear cut diagrams. Economics diagrams are very important to answering a question, and there should be a well developed paragraph assisting the economics diagram to do its job well.

However, perhaps this economics paper could be better developed with real life examples and other illustrations that could show the theory. While the question asks for the "relevant economic theory", and this essay has done precisely that, this economics essay could be helped further by developing the paragraphs with some real life examples. How else could this essay have been improved? Think of how you could help to make this a better essay than it already is.

Special thanks and cheers to model students SS, AG, and JC for their kind yet invaluable contributions. Special thanks to SS for his editing and vetting of this sample essay to make it even better than it was originally. Thank you for reading, and cheers. 

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