Question

A) Compare and contrast the long run equilibrium point of a monopoly firm with that of perfectly competitive firm by selecting most appropriate diagrams.
B) Should the government break up a monopoly into a great number of perfectly competitive firms? Briefly explain.
My work

What are some of the implicit costs incurred by an entrepreneur in running his / her business ? How are these implicit costs estimated ? Briefly explain to justify your answer.

Does the soft drink industry conform more closely to Monopolistic Competition or Oligopoly ? Briefly explain to justify your answer.

Answer 1

Monopoly firm:

A market structure characterized by a single seller, selling a unique product in the market. In this market, the seller faces no competition, as he is the sole seller of goods with no close substitute. Factors like government license, ownership of resources, copyright and patent and high starting cost make an entity of single seller of goods. All these factors restrict the entry of other sellers in the market. In this market, the single seller is the market controller and the price maker. He enjoys the power of setting the price for his goods.

In monopoly, long-run occurs at the point of intersection between the monopolist's marginal revenue (MR) and long-run marginal cost (LMC) curves. Since at the minimum point of the LAC curve, LAC = LMC, we have price = LMC in the long-run equilibrium of the competitive firm. In monopoly, P = AR>MR at each output.

where, LMC= long run marginal cost

LAC = long run average cost

AR = Average revenue

MR = Marginal revenue

Profit maximisation occurs where MR=MC. therefore the equilibrium is at point P.

This diagram shows how a monopoly is able to make supernormal profits because the price AR if greater than AC.

Usually, supernormal profit attracts new firms to enter the market, but there are barriers to entry in monopoly, and this enables the monopoly to keep supernormal profits.

Perfect Competition firm:

Perfect competition describes a market structure where competition is as its greates possible level. A market having the following characteristics is called as perfect competition:

• Large number of buyers ans sellers
• Homogenous product is produced by every firm
• Free entry and exit of firms
• Zero advertising costs
• Consumer have perfect knowledge about the market and they are well aware of any changes in the market. Consumers indulge in rational decision making.
• All factors of production like labour, capital etc. have perfect mobility in the market and are not hindered by any market factors or market forces.
• No government intervention.
• No trasportation costs
• Each firm earns normal profits and no firms can earn super-normal profits.
• Every firm is a price taker. It takes the price as decided by forces of demand and supply. No firm can influence the price of the product.

In long-run equilibrium under perfect competition, the price of the product becomes equal  to the minimum long-run average cost (LAC) of the firm.

where, MC = Marginal Cost

ATC = Average Total cost

In the long-run, economic profit cannot be sustained. The arrival of new firms in the market causes the demand curve of each individual firm to shift downward, bringing down the price, the average revenue and marginal revenue curve. In the long-run, the firm will make zero economic profit. Its horizontal demand curve will touhc its average total cost curve at its lowest point. The long-run equilibrium point for a perfectly competitive market occurs where the demand curve (price) intersects the marginal cost (MC) curve and the minimum point of the average cost (AC) curve.