Question

In: Economics

a)How do we compare the price and quantity of a monopoly and perfectly competitive market? b)Why...

a)How do we compare the price and quantity of a monopoly and perfectly competitive market?

b)Why will the perfectly competitive solution be the only efficient allocation?

Expert Solution

a.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price.

The profit-maximizing condition of perfectly competitive firm is

P=MC

The aim of perfectly competitive firm is to achieve efficiency and maximize welfare by producing more at lowest price.

A monopoly firm is a kind of market structure in which there is only one seller and many buyers, therefore a monopolist firm has market power both in the short-run as well as in the long-run.

A monopolist firm is a maker and profit-maximizing condition is

MR=MC

The aim of the monopoly firm is to maximize profits.

In case of monopoly market quantity supplied is less compare to perfectly competitive firm but in case of perfectly competitive firm price is lower compare to a monopoly firm.

Hence in case of perfect competition consumer surplus is more compare to monopoly firm.

Monopoly price is more than the efficient price and quantity is less than the efficient quantity.

b.

The equilibrium is determined by the intersection of demand and supply curve.

Marginal cost to producer is supply curve and willingness to pay by consumers is demand curve. When both are equal, then there will be efficiency achieved.

It means there will be efficiency when

Willingness to pay= marginal cost.

The perfectly competitive solution will be the only efficient allocation because it is not possible to produce more quantity at the prevailing price given the technology and resources constraint in the short-run.

Rahul Sunny answered 7 months ago

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