Question

using graphs, describe how prices and output decisions are made under :
a)perfect competition
b) monopoly
c) describe the concept of economic profit and how profits can occur under each of the markets described above

Answer 1

The Determination of Price and Output in

a) In a perfect competition output is determined at the intersection of P=M.C and in perfect competition each firm is a price taker and price is determined by the intersection of the market demand curve and the market supply for the whole industry.

b) Monopoly

In a monopoly output produced is determined at the intersection of MR=M.C and price is determined by the A.R curve

Here,FC line denotes A.R Curve

Here,db line denotes M.R Curve

Curve gbc denotes M.C curve

c) An economic profit is the difference between the revenue received by the firm from the selling an output and the opportunity cost of the inputs used in the production. Unlike accounting profits in the economic profits,opportunity costs are deducted from revenues earned.

In case of monopoly -Firm has a positive economic profit in the long run as the price charged by firm is greater than M.C since there are barriers to entry for other firms.

In case of perfect competition-The firms economic profit is zero since p=MC=A.C in the long run and firms only incur normal profits in the long run since firms can enter and exit in a perfectly competitive market.