perfect competition and monopoly
Only similarity between the two is that at equilibrium level of output MC = MR.
The differences are as follows:
- In perfect competition the price is equal to the marginal cost at the equilibrium while the price is greater than the marginal cost at equilibrium under monopoly. This is because in perfect competition the AR curve being a horizontal straight line intersects the MR curve at all levels of output. So at equilibrium when marginal cost is equal to marginal revenue it is also equal to the average revenue (price). While in monopoly the AR curve slopes downward and hence AR is greater than MR always. So at equilibrium when MC = MR, AR (P) > MC.
- While under perfect competition equilibrium is possible only when the marginal cost is rising at the point of equilibrium, but monopoly equilibrium can be reached whether the MC curve is rising, falling or constant. this is because the marginal revenue curve being downward sloping in monopoly can cut the marginal cost curve from below at equilibrium even when the latter is rising, falling or constant whereas in perfect competition the horizontal MR curve could cut the MC curve from below only when the latter is rising to ensure second order equilibrium condition.
- A perfectly competitive firm can be in long run equilibrium only at the minimum of LAC curve while the monopolistic firm is in equilibrium at the point where the average cost is still falling. While in perfect competition the marginal and average cost curves are horizontal the firm can expand profitably till the level of output at the minimum of LAC. But a downward sloping MR curve intersects the MC curve at an output earlier than the min. of LAC.
- Due to the strong barriers of entry the monopoly can enjoy supernormal profits even in the long run. While in perfect competition the new entrants will compete away all the existing profits and the firm can make only normal profits in the long run.
- Under monopoly the price is higher and output lower than the perfect competition. Monopolists restrict output to raise prices and earn supernormal profits as they equate MR = MC while in perfect competition it is P = MC.
- Monopoly can have price discrimination while perfect competition cannot. This is because the firms facing perfect competition firms experience a perfectly elastic horizontal demand curve and any attempt to raise prices will lead to lesser customers of the homogeneous product and there is no incentive to sell below the market price while in monopoly the demand curve is downward sloping and the buyers may be charged different prices by the seller.
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