Question

You should discuss the concept of Profit maximization in Perfect Competition and Monopoly. Discuss the different potential scenarios (profit and loss making illustrations for both market structures). Do refer also in potential alternative company strategies, except of profit maximization.

A report of 3.000 words should be submitted and a presentation of approximately 10 slides should be made, during a Teams session by the students.

Answer 1

In perfect competition both buyer and seller is a price taker, since equilibrium price and quantity is determined by the market forces. Since, there are large number of buyers and sellers hence any a buyer or seller alone does not has the power to influence the equilibrium price and quantity.

In monopoly seller is a price maker and buyer is a price taker. But seller cannot decide both price and quantity simultaneously. To increase sell monopolist has to cut prices.

For perfect competition, P = MC, but in monopoly P is greater than MC. But first order condition for profit maximisation for both the perfectly competitive firm and monopoly is MR = MC. Second order condition is MR cuts MC at the upward sloping part of MC.

Though a perfectly competitive firm in short-run can either do super-normal profit, loss or normal profit but in long-run it ends up doing only normal profit, since, there is free entry snd exit of the firm. For ex- Suppose all firms in the industry is earning super-normal profit. Then by attracting by the profit new firms will enter the industry. As new firms took entry supply of the commodity increases as a result price falls and thus in the long run all firms ends up in earning only normal profit. Again, suppose all firms in the industry are incurring losses. Then the firms those who have the ability to fight against the losses will wait until good times come, when few weak firms those who do not have the ability to bear the losses will leave the industry and the other strong firms will remain in the industry ends up only earning normal profit.

Monopoly firms may incur super-normal profit, loss or normal profit both in the short run and in the long run.

The equilibrium price of a commodity in a perfectly competitive firm is lesser and equilibrium quantity is more than that of a monopoly firm. Since monopoly firm do play the strategy of price discrimination. By discriminating price the monopoly firm extracts the consumers surplus from the consumers. This discrimination of price is possible since monopoly firm do not produce any close substitute product that are available in the market That is why, they can be able to charge that much price according to the willingness to pay of each and every consumers. Three types of price discrimination are there, first degree, second degree and third degree. In first degree price discrimination the whole consumer surplus is extracted. In second degree price discrimination not full but some parts of the consumer surplus is extracted. In third degree, few parts of the consumer surplus is extracted which is lesser than the second one. They charge a price based on price elasticity of demand for the commodity. If price elasticity of demand is more for any commodity then the monopoly will charge lower price and if elasticity is lesser then monopolist will charge higher price for the commodity.