Perfect competition is a term used to describe a market
where there are many buyers and many sellers. As there is nothing that differentiates
the products manufactured by one firm from that of another, buyers are free to shift
from one seller to another. The price of goods in perfect competition is decided solely
by the factors of demand and supply existing in the market. As no individual firm can
influence the price, the only way in which it can increase profits is by increasing its
operational efficiency.
In a monopoly on the other hand,
there is only one seller. Buyers do not have a choice and have to accept the price
offered by the firm. Firms that operate in these conditions can manipulate prices to
maintain their profits and there is no necessity for them to increase operational
efficiency.
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