Question

1. Monopoly price compared to the price of a competitive firm

2. Efficiency of resource allocation

3. Monopoly and its impact on large-scale production and unit cost of production

Answer 1

1) Monopoly price is greater than the price of a competitive firm. This is because of no competition of monopoly firm with other firms. Perfectly competitive firm price is lower because there is large number of firms exist in the market which increases competition and reduces price.

2) Under perfect competition, resource allocation is efficient and firm produces output where P = MC. Monopoly firm does not produce efficient output because its aim is to maximise profit.

Monopoly is a form of market in which there exist only a single seller who sold goods which does not have close substitutes. There is barrier in the entry of new firms. Under monopoly, the firm is a price maker because it can fix the price for its product. It has free control over the supply of the product. A monopolist firm faces a market demand curve which is negatively sloped. It means that the firm will have to reduce the price to increase its sale. Demand curve of a firm under monopoly is less elastic because the product has no close substitutes. Equilibrium is where MR = MC.

Perfect Competition is a form of market structure in which there is free entry and exit of firms and firms are selling homogeneous and identical products in the market. Firms under this form of market are price takers rather than price makers. Industry determines the equilibrium price from the demand and supply curve intersection. Sellers can sell any unit of commodity at that price and firms does not have any price control over the commodity. If one seller try to charge higher price then it will lose all his customers because all firms are selling similar products in every respect like color, shape, brand, etc.