Question

Compare the output and price efficiency between a Highly Competitive firm and a single price monopoly. In your explanation use a graph to compare price and output.

Answer 1

Perfect competition is a type of market structure where there are many buyers and sellers in the market of homogeneous goods. Since there are so many buyers and sellers, no one seller can affect the prices charged by them. Thus the prices are determined by market forces and the firms are price takers. Also, we assume that in perfect competition there is free entry and exit of the firms. In perfect competition, price = average revenue = marginal revenue (prices charged is the same no matter how quantity is produced by the firm and there the demand curve is perfectly elastic).

In perfect competition equilibrium price and output are determined at the point where the marginal cost curve intersects the demand curve or where MC = AR (aggregate revenue or demand curve)

A monopoly is a type of market structure where there is only one seller of the good in the market. Since there is only one seller, he has full control over the prices to be charged and output to be sold in the market.

Since a monopolist is a price maker, he charges price higher than charged in the perfect competition and supply lesser goods than by the perfect competition. The profit-maximizing level of output of the monopolist is where the MC (marginal cost) = MR (marginal revenue). Here, the profit-maximizing output level is determined and the price charged is determined at the demand curve.

Here, we can see that MC is the marginal cost curve, MR is the marginal revenue curve and AR is the aggregate revenue or the demand curve. The output level in the perfect competition is determined at the point where the marginal cost curve intersects the demand curve. Thus, Qc is the quantity supplied by perfect competition. Price is determined on the demand curve, so corresponding to this quantity price charged on the demand curve is Pc.

A monopolist maximizes its profit at the point where the marginal cost curve intersects the marginal revenue curve. At this intersection, the quantity supplied is Qm. Price is determined on the demand curve. Thus the price corresponding to Qm quantity on the demand curve is Pm.

Thus, we can see that the price charged by the monopolist is higher than charged by perfect competition (Pm>Pc), and the quantity supplied by a monopolist is less than supplied by the perfect competition (Qm<Qc).