AQA A-Level Economics (7136) · Competitive & Concentrated Markets
Specification points
- Efficiency: allocative, productive, dynamic and X-inefficiency.
- Perfect competition in the short and long run.
- Monopoly, monopoly power and price discrimination.
Efficiency concepts
- Allocative efficiency — P = MC; output reflects consumer preferences.
- Productive efficiency — production at minimum ATC.
- Dynamic efficiency — innovation and investment over time.
- X-inefficiency — higher costs due to a lack of competitive pressure.
Perfect competition
Assumptions: many buyers and sellers, homogeneous products, perfect information, no barriers to entry. Firms are price takers (AR = MR). In the short run they can make supernormal profit or losses, but in the long run entry and exit compete profit down to normal profit. Perfect competition achieves both allocative and productive efficiency but little dynamic efficiency.
Monopoly
A monopoly is a single dominant seller protected by barriers to entry. It is a price maker and produces where MC = MR, restricting output and charging P > MC — allocatively inefficient, with supernormal profit in the long run.
| Perfect competition | Monopoly | |
|---|---|---|
| Price | = MC | > MC |
| Long-run profit | Normal | Supernormal |
| Efficiency | Allocative + productive | Neither guaranteed |
Key definitions
| Term | Definition |
|---|---|
| Price taker | A firm that must accept the market price. |
| Monopoly power | The ability to set price above marginal cost. |
| Price discrimination | Charging different prices to different consumers for the same good. |
Evaluating monopoly
Monopoly is not always harmful: economies of scale (natural monopoly) can lower costs, and supernormal profit can fund dynamic efficiency. Price discrimination (needing market power, separable markets and different PEDs) raises profit and can sometimes raise output.
Worked example
A pharmaceutical firm with a patent (a barrier to entry) is a temporary monopoly. It charges P > MC, earning supernormal profit — allocatively inefficient — but that profit funds research into new drugs (dynamic efficiency). The trade-off between short-run inefficiency and long-run innovation is the key evaluation.
Common exam mistakes
- Confusing the four efficiency types.
- Assuming monopoly is always bad.
- Forgetting perfect competition earns only normal profit in the long run.
Exam technique
Compare the two structures with diagrams on price, output, profit and efficiency, then evaluate monopoly using economies of scale and dynamic efficiency.
Quick revision
- Perfect competition: price takers, normal profit long run, efficient.
- Monopoly: price maker, P > MC, supernormal profit, allocatively inefficient.
- Efficiency: allocative, productive, dynamic, X-inefficiency.