Question

Due: May 10, 2019 at 10:00 PM

Briefly summarize the competitive process that transpires from the short-run to the long-run in perfectly competitive market structures and contrast it with what happens during the same time horizons in the monopoly industries. What major differences between a monopoly and a perfectly competitive firm can be clearly seen when comparing the graphs illustrating their short-run average and marginal production cost curves, as well as demand and marginal revenue curves? In what industry structure will the monopoly firm be likely to operate in the long-run if the market for its output becomes contestable and if it is unable to establish any entry barriers? Give a couple of examples of the entry barriers that a monopolist might erect to prevent potential rivals from entering a particular industry.

Answer 1

Perfect competition is a market situation wherein economic theory has a meaning directly opposite to everyday use of this term. Here in this kinda market there is no rivalry.

In short run the aim of the firm is to earn maximum profit and the firms earn above normal profit and the equilibrium is set at marginal cost = marginal revenue. At an excess profit situation, though there is freedom of entry and exit in perfect competitive market, new firms get attracted and this leads to fall in price and increase in factor prices in long run.This happens till the long run average cost is equal to the demand defined by the market prices. That means a situation where profit is less than normal profit is incurred. Then some firms makes losses and leave the industry, bringing in normal profits and at this point the short run marginal cost and the long run is equal.

Monopoly is a situation in which there is only single seller in the market and he is a price maker.

In short run the monopolists earn excess profit and in long run even more profit. And the equilibrium is at where long run average cost curve equals the short run average cost curves.

Short run average and marginal cost curves of perfect competition and monopoly differ in that under the former, both the curves intersect before the MC=MR intersection. But under the latter this happens later.

The same for the demand and revenue curves is that, under perfect competition, the marginal revenue curve is horizontal to the x axis and in monopoly it is a straight line sloping downwards and this is perfectly half of the demand curve.