Difference between Perfect and Monopoly Competition

Since under perfect competition MR curve is a horizontal straight line, MC curve can cut the MR curve from below only when MC curve is rising.

But, under monopoly, MR curve is falling downwards and therefore MC curve can cut the MR curve from below whether it is rising, falling or remaining constant. In Fig. 9, MC is rising.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

This ensures that there will be equilibrium in monopoly as in perfect competition. The equilibrium output is OM and the monopoly price is OP and monopoly profits are shown by the rectangle PQRS.

Let us show equilibrium when MC is constant and is equal to AC. This condition is incompatible with equilibrium under perfect competition, since if a firm can afford to produce at all, there would be no limit to its size unless competition becomes imperfect.

Monopoly output is OM, monopoly price is OP and monopoly profits PQRS. The MC curve cuts the MR curve from below. But if MC curve is falling more rapidly than MR curve, equilibrium is clearly impossible.

The situation which is incompatible with monopoly equilibrium is one where MC curve is falling more swiftly than MR curve. If the MC curve is steeper than the MR curve throughout its length, there can be no output at which the firm is in equilibrium.

The second point of difference between monopoly and perfect competition is that while the competitive firm is, in the long run, able to make only normal profits, a monopolist can make super-normal profits even in the long run.

Under perfect competition, super-normal profits can be earned in the short run, but in the long run they will be competed away by new entrants into the industry.

But in monopoly, it is quite possible for the firm to earn super-normal profits in the long run there are strong barriers to the entry of new firms in the monopolistic industry.

If the monopolist in the short run is making super-normal profits, they cannot be eliminated by the entry of new firms in the long run with the result that these super-normal profits will persist in the long run.

A third point of difference between monopoly equilibrium and competitive equilibrium is that under monopoly, price is higher and output smaller than under perfect competition, assuming cost conditions in two cases to be the same.

Since MR curve is lower than the price, MR curve cuts the MC curve at a lower point. Hence output is lower than the competitive output and price is higher than the competitive price.

Fourthly, the sales curve of the competitive firm is perfectly elastic. It can sell any amount at the going price but the sales curve of the monopolist will always be downward sloping.

The monopolist can hope to sell more only at lower prices. Thus, while the AR curve is horizontal for the competitive firm, it is downward sloping for the monopolist.

Lastly, the competitive firm has no control over the price— the price is already fixed and given for him.

However the monopolist has some control over the price. He cannot, of course, raise prices to any extent and yet make super-normal profits, because the demand curve is seldom perfectly inelastic.

Moreover, a high price does not necessarily mean high profit. ‘A monopolist is not at the mercy of his competitors, but what he can sell at any price depends on what the consumer is prepared to buy at that price; he cannot fix both prices and sales’.

x

Hi!
I'm Eddie!

Would you like to get a custom essay? How about receiving a customized one?

Check it out