The upcoming discussion will update you about the similarities and differences of perfect competition and monopolistic competition.
The similarities between competitive firm and monopoly!
1. Number of firms:
In both under perfect competition and Monopolistic competition the number of firms is large.
In both firms compete with each other.
3. Entry or exit of firms:
In both market there is freedom of entry or exit of firms.
4. Equilibrium is there:
In both, the equilibrium is established at the point of equality of marginal cost and marginal revenue.
5. Super-normal profits or incur losses:
In both the market situations, firms can earn super normal profits or incur losses in the short period. But in the long period, firms earn only normal profit.
The differences between competitive firm and monopoly firm are as follows:
1. Firms are price taker and output adjuster:
In a competitive market the number of buyers and sellers are large. The price is determined by the industry keeping in view the aggregate demand and aggregate supply. The firms are price taker and output adjuster.
Under Monopoly there is no difference between firm and industry. Firm itself is an industry. The firm determines the price and output.
2. Marginal Cost:
In perfect competition Price = MC; in monopoly P > MC. Under perfect competition the individual firm’s output is a small part of the total output. Variation of its output has no effect on prices and therefore marginal revenue is equal to price. But the Monopolist is by definition the sole producer. Therefore, if he wants to sell more he must reduce the price. Hence, under Monopoly the marginal revenue is less than price.
3. Difference as regards elasticity:
The supply curve of a firm under perfect competition is perfectly elastic. The individual firm under perfect competition has an insignificant part of the industry and variation of its output does not affect prices. Therefore, he can sell as much or as little of his output as he chooses at the current price.
The average revenue curve of the individual firm under perfect competition is therefore a straight line parallel to the X-axis. But the monopolist is the sole-producer. Therefore, variation of his output will cause variation in prices. The average revenue curve of the monopolist is a downwards sloping curve.
4. Slow in production:
Economists are of this opinion that the monopolists are likely to be inefficient and slow in producing technological changes as compare to perfect competition. The perfect competition forces each firm to either be efficient or perish or quit.
5. Monopoly price is higher than Perfect Competitive Price:
Under Perfect Competition, price equals marginal cost, while under Monopoly price exceeds marginal cost. There is an exception to the rule that Monopoly price is higher than competitive price. There may be a commodity with a very steeply decreasing cost curve and a highly elastic demand. In such a case, Monopolist will make maximum gain by selling it at a price which is lower than what the price would be under competition. This is however, a highly improbable situation.
6. Monopoly output is lower than Perfect Competitive Output:
The Monopoly output may be higher than the competitive output in the case of a commodity having a steeply decreasing cost curve and a highly elastic demand
7. Difference as regards the slope of Marginal Cost Curve:
Under perfect competition in the long-run, equilibrium is possible when the marginal cost is rising at the point of equilibrium. But under Monopoly there may be equilibrium whatever may be the shape of the marginal cost curve.
8. The profits earned by both the market are different:
Under Perfect Competition, the firm in the long-run makes normal profit. Under Monopoly, the firm gets super-natural profits. From the facts stated above we can say that Monopoly leads to an inefficient allocation of resources from the economy point of view.
The monopolist restricts output, increases price to maximise his profits and hold price above the marginal cost and marginal revenue. Whereas the perfect competition leads to maximum allocation of resources and produces more than Monopoly.