Question

Compare the market outcomes and economic welfare among a perfectly competitive firm, a monopolistic firm and an oligopolistic firm on: efficiency, consumer surplus, economic profit in the long run.

Answer 1

Perfect competitive firm will be under equilibrium in the long run where we will have price = average cost = marginal cost. Price is equal to lowest of long run average cost. Here output is fully efficient as it is producing at the lowest point of average cost or at its minimum of average cost. The equilibrium output will be where we will have average cost is lowest and price will be equal to minimum of LRAC. Here we will have highest efficiency and maximum surplus because we will not face any kind of dead weight loss. Economic profit under perfect competition is zero. Here producer only get normal profit. The consumer surplus is highest under perfect competition though there will be no producer surplus because of price = marginal cost. So economic welfare is highest under perfect competition because of no dead weight loss.

The monopoly market is a kind of market where we will have one seller and many buyers. In case of monopolistic firm long run equilibrium will take place where marginal revenue is equal to long run marginal cost. Equilibrium price will be corresponding point to equilibrium which touches the average revenue curve. Equilibrium quantity will be corresponding line to equilibrium which touches the horizontal axis. The price will be higher than the perfect competition and quantity will be lower than the perfect competition. Here firm will not necessarily produce at efficient point i.e lowest or minimum point of AC. The welfare is not maximised here because we will face highest dead weight loss among these three firm i.e perfect competitive, monopoly and oligopoly. Here producer will have a chance to earn economic profit. Because there will be price charged higher than the average cost. If in case of price charged is equal to average cost at equilibrium point then it will earn normal profit. But there is most possibility to earn economic profit.

In case of oligopoly market we will have the market structure where exist few sellers and many buyers. In this market long run equilibrium of a firm will depend on nature of the market. In this market the firms are dependent to each other. If they produce differentiated product and understand the interdependence then they can behave close to monopoly and if they compete to each other then it will be case of like competition. In this case due to competition equilibrium will be equal to marginal revenue equal to long run marginal cost. But it will earn only normal profit because due to competition there will be price cut as long as they can earn some profit from there. In this market firm may not produce at its efficient level because it's production depend on other firm's behaviour. But welfare will be higher than monopoly but lower than perfect competition. Similarly we can face dead weight loss depend on level of production. The consumer surplus will be higher than monopoly but lower than perfect competition. Economic welfare is lower than perfect competition but higher than monopoly. As in oligopoly there we can face some kind of competition if they do not form any kind structure of behaving like one firm. So welfare is higher than monopoly but lower than perfect competition.