Efficiency is a technical relationship between input and output. To be the technically efficient is when you produce maximum output with the minimum input. Another way of being efficient is being allocatively efficient. This is when a firm produces at the minimum point on its Average cost curve. Perfect competition is when there are a large amount of firms in the industry all producing the same homogenous good. In a monopoly there is only firm in the industry, and it is the sole supplier. This essay will look at the structure of the perfect competition and assess it efficiency. Then we will look at the structure of the monopoly and how efficient it is also. This essay will argue that on balance, perfect competition is more efficient then a monopoly.

A perfect competitive industry has certain characteristics. There are many buyers and sellers in the industry. There is perfect knowledge throughout the industry. All products are homogenous goods. There is free entry and costless entry into the industry. All firms in the industry are interested profit maximisation only normal profits will be able to be made in the long run. This is because, if there are supernormal profits being made in the short run, due to an increase in demand, new firms will be attracted by these profits. Due to perfect knowledge and free entry into the industry these new firms will enter, reducing each firm’s individual demand until profits are at a normal level. Similarly if there is a fall in market demand, so all firm makes a loss, due to the costless exit, firms will leave due to costless exit, reducing each individuals firms loss until normal profit is reached. Each seller is a price taker. They believe that what they contribute is so small, that it does not affect overall market price. The greengrocer selling bananas for 25p per kilo believes that his actions do not affect the overall market price for bananas. If an individual seller tries to raise the price level of his quota of bananas to 26p per kilo, his total revenue will be zero. This is because the many consumers have the perfect knowledge to know that they can buy the homogenous bananas from another banana seller at 25p per kilo.