17: Pricing and Output Policies in Perfect Competition and Monopoly

Wednesday, February 29, 2012

In Perfect Competition:

Prices are determined by the market forces of demand and supply. All firms are price takers.
Demand Curve is perfectly elastic. Average Revenue (AR) and Marginal Revenue (MR) remain the same. Price is determined where Marginal Cost (MC) equals Average Cost (AC).

In a Monopoly:

Either price or output is set by the firm. Firm is a price maker. Demand Curve slopes downwards. It is also the market demand curve. Average Revenue (AR) and Marginal Revenue (MR) will fall. Price is determined at a point which is higher than Marginal Cost (MC) and Average Cost (AC). 

Differences between Perfect Competition and Monopoly

Perfect Competition
Monopoly
Many suppliers
Single supplier
Firms are price takers
Firm is a price maker
Small scale production
Large scale production, economies of scale
High Average Cost
Lower Average Cost
Lower selling price due to competition
Higher selling price
Enjoys Normal profit
Enjoys Abnormal profit
No serious barriers to entry
Entry restricted by various barriers
Competition leads to efficiency
No competition

Reasons for discouraging monopolies

  • It restricts supply and raises revenue 
  • It makes excessive profits 
  • Lack of competition leading to inefficiency 
  • Less varieties of goods and services 
  • Restricts new ideas 
  • Limits new products etc 
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