Question

With the aid of a diagram, explain the optimal quantity produced by firms in a competitive market and a monopoly.

Answer 1

The both markets produce where at the quantity where the marginal cost equals the marginal revenue , this is also where the firm maximizes the profit. In the perfect competition the price equals the marginal cost so the firm is economically as well as allocatively efficient. While the monopolist charges a very high price that is above the marginal cost so the market is inefficient and there is a dead weight loss associated with the monopoly outcome. The monopoly charges a very high prices and produces too little, so the weaker sections of the society cannot be able to afford the good and that is welfare loss. In the perfect competition the price equals marginal cost so it is socially efficient and produces much output to satisfy the needs of the society. In the perfect competition there is no dead weight loss, also the consumer surplus is high compared to the monopoly.