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Competition Leads to a More Efficient Use of Resources

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Competition leads to a more efficient use of resources. Discuss.

The word “efficiency”, in economists’ dictionary, is often interpreted into the degree of an economy allocates scarce resources to meet the needs and wants of consumers. As we can see that a free market economy is the one in which resources are allocated based on the principle of self-interests. Where there are profits, there are firms, and where there are firms to produce identical goods and services, inevitably, there is competition. The degree of competition determines the market structure which is the main determinant of the behaviour or conduct of firms. This in turn determines the efficiency in the use of scarce resources. It is often argued that competition leads …show more content…

As it has shown in figure 3, the total welfare in the perfectly competitive market is the area of ABPPC and ACPPC, whereas the total utility under monopoly is the same area less the area of ADE. By setting a higher price and less amount of output, the monopolist may have gained more benefits from the loss of consumers, but the deadweight welfare loss representing total societal loss has also occurred which is a social waste made by the monopolist. Therefore, competition as the example given in perfect competition would lead to a more efficient use of society’s resources.

Although perfect competition would bring us the maximized economic efficiency, monopoly in certain industries such as water supply industry may seen to be more beneficial due to the nature of the industries. The reason for this is that in some industries which require scale economies, there is an absolute advantage of a monopolist over small firms in perfect competition—economies of scale—that the monopolist is able to produce its goods and services at a lower cost level because of larger scale of production, more efficient use of large machines, more specialized division of labour or even more efficient management. If we take scale economies into account, perfect competition leading to efficiency is not that preferable: shown in figure 4, the

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