Question

Question 3

(a) Draw and clearly label a diagram that shows the level of output at which a monopoly maximises profits. Show the monopoly price and level of profits made by your monopoly firm. Use 2 or 3 sentences to explain the key features of your diagram.

(b) Refer to the diagram you drew for part (a). How is this situation similar to that of a competitive market? How is it different? Explain the reason(s) for each of the differences you note. Hint: list and explain as many similarities and differences as you can think of.

Answer 1

(a). Monopoly is a kind of market where we get a single seller and many buyers exist in the market. In this market we have downward sloping demand curve and here we have AR > MR. Monopoly maximises it's profit where MR = MC. In the following figure we can show the monopoly equilibrium point (MR= MC point i.e Em in the figure) , equilibrium price and quantity.

(b). The perfect competition is a market where we have many sellers and many buyers and every seller and buyer in this market is price taker.

Similarities between Monopoly and Perfect competition:

I) Both Monopoly market and perfect competitive market faces same cost structure. It means in both market they same type of cost. It is because both are facing competitive factor market.

II) In both market they have same production structure i.e they have same type of production function. The level of technology is same in both market.

Differences between Monopoly and Perfect competitive market:

I) These two market are two extreme market structure. In perfect competitive market we have equilibrium at P = MC(at Ec in diagram) but Competitive equilibrium at MR = MC(at Em in diagram).

II) In competitive market price is set at equal to marginal cost (Price = MC , Pc = MC) but in monopoly market P > MC. It happens because P > MR in this monopoly market.

III) In monopoly market at equilibrium monopoly earns positive economic profit (Area P₁MNP*) but in equilibrium at competitive market there is no economic profit only normal profit.

IV) In monopoly market profit maximising price is greater than profit maximising price of competitive market. It monopoly price Pm is greater than competitive price.

V) Profit maximising quantity Qm is lower than competitive equilibrium quantity which is corresponding to point Ec. Monopoly quantity is lower because here equilibrium take place at MR = MC, but in competitive market it is P = MC. In this market MR < Price.

VI) In monopoly producer is price setter but in competitive market both producer and seller are price taker. In monopoly market seller set the price according to it's own profit maximising condition.

VII) In monopoly market we face some dead weight loss to society but in competitive market we do not have this kind of dead weight loss. It is because monopoly market is not fully efficient but competitive market always in efficient.

VIII) In monopoly we get monopoly power and this monopoly power varies inversely with elasticity. It means monopoly power [(P- MC)/P] = 1/Ep. Higher elasticity means lower monopoly power and vice versa.

IX) In monopoly we get price discrimination but in perfect competition there is no scope of price discrimination. This is because monopoly can set the price according to it's own power.

X) In monopoly market we do not get any supply curve i.e we do not get any particular relation between price and quantity supplied but in perfect competitive market we can have some supply curve relation.

XI) Monopoly equilibrium will always take place at elastic portion of demand curve but in perfect competition it may not happen.

So, we get various differences between Monopoly market and perfect competitive market. There is more of differences exist because these two are kind of opposite market in nature.