As Lipsey&Chrystal (2007:160) states that: "monopoly is at the opposite extreme from perfect competition." In other words, monopoly is where there is a single seller produce unquiet product that has no close substitute within the market. This thus gives the monopoly the power to charge the price of the products; therefore they would be the price maker in the market. (Bamford, 2008). As a result, they would decide what the price is going to be. Therefore, the monopoly would be freely to allocate resources within the market as there are no competitors. How does monopoly work in the market? This is could be analyzed in terms of resources allocation. (Witztum 2005:172-173).
Diagram above (Tutor 2U)
As can be seen form diagram above, it shows how price and output are differ between the monopoly and the perfectly competition. If this market is a monopoly, profits would be maximized where MC=MR, gives the equilibrium price P monopolist and quantity Monopoly Output. If this market is perfectly competitive, the equilibrium would now be where the market demand curve crosses the market supply curve. This gives the equilibrium price P competition and quantity Competition Output. This would in turn, leads to the market price higher than the competition price and the market quantity less than competition quantity. This means the resources are allocated inefficiency in the industry in terms of both allocative and productive inefficiency. Monopoly charges higher price than marginal costs, this will lead to a loss of allocative efficiency. The monopoly does not produce the output at the lowest point of the average cost curve, thus this would lead to productive inefficiency. The resources are also allocated inefficiency in terms if X-efficiency (Begg, 2008). This is due to less competition within the market. As there are a lot of barriers to entry the market, for example, high capital costs,...