Question

word count 1500

Briefly contrast the difference between equilibrium market outcomes in a
monopoly and perfect competition. Illustrate your answer with diagrams.

Answer 1

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Introduction

There are some differences between equilibrium market outcomes in a monoploy and perfect competition

A Monopoly market is characterized by the profit maximizer, price maker, high barriers to entry, single seller, and price discrimination. Monopoly characteristics include profit maximizer, price maker, high barriers to entry, single seller, and price discrimination

Difference can be described with the help of below points

Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient. Monopolies produce an equilibrium at which the price of a good is higher, and the quantity lower, than is economically efficient.

Monopoly price is higher than perfect competition price. In long period, under perfect competition, price is equal to average cost.

In equilibrium, monopoly sells ON output at OP price but a perfectly competitive firm sells higher output ON1 at lower price OP1.

Equilibrium in perfect competition is the point where market demands will be equal to market supply. A firm's price will be determined at this point. In the short run, equilibrium will be affected by demand. In the long run, both demand and supply of a product will affect the equilibrium in perfect competition.

In a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero.

In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient.

Explanation:

The price in perfect competition is always lower than the price in the monopoly and any company will maximize its economic profit ( π ) when Marginal Revenue(MR) = Marginal Cost (MC).

The company in the monopoly has a monopoly power and can set a markup to have a positive value for π

For Example

Agricultural markets are examples of nearly perfect competition as well. Imagine shopping at your local farmers' market: there are numerous farmers, selling the same fruits, vegetables and herbs. You can easily find out the prices for the goods, but they are usually all about the same

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