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
