Question

1. Draw three graphs that show the following:

1. How market price is determined in the long run for a perfectly competitive market.
2. How this market price determines the quantity produced in a perfectly competitive market in the long run (be precise with what other curves are intersecting at this quantity).
3. The market price and quantity produced in a monopoly. How do the price and quantity compare to a perfectly competitive market?

Answer 1

Ans) 1) In Perfectly competitive market, in long run, firms always earn zero economic profit and price is equal to minimum of ATC.

Market price = minimum of ATC.

2) In Perfectly competitive market, for an individual firm, price is equal to marginal revenue (P=MR). A profit maximising firm produces the quantity where MR and MC curve intersect.

3) In Perfectly competitive market, demand and marginal revenue curve overlaps. While for monopolist, marginal revenue curve lies below the demand curve.

A Perfectly competitive firm produces the quantity where MR and MC curve intersect.

A profit maximising monopolist produces the quantity where MR and MC curve intersect and then uses demand curve to determine the price.

Monopolist produces less quantity than perfect competition and charges higher price than Perfectly competitive firm.