Learn about the comparison between long-run equilibrium under monopoly and perfect competition.

In long-run equilibrium under perfect competition, the price of the product becomes equal to the minimum long-run average cost (LAC) of the firm. In monopoly, on the other hand, long- run equilibrium occurs at the point of intersection between the monopolist’s marginal revenue (MR) and long-run marginal cost (LMC) curves.

Since at the minimum point of the LAC curve, LAC = LMC, we have price = LMC in the long-run equilibrium of the competitive firm. On the other hand, in monopoly, p = AR > MR at each output.

Therefore, at the long-run equilibrium output at the MR = LMC point, we have, for the monopolist, p > LMC. In other words, in the long-run equilibrium, price is equal to marginal cost for the competitive firm and price is greater than marginal cost for the monopolistic firm.

Now, under certain conditions, demand price for a commodity represents its marginal social valuation. Similarly, long-run marginal cost usually represents the marginal social cost of pro­duction. Therefore, under monopoly, the marginal value of a commodity to society exceeds the marginal cost of its production to society.

The society as a whole would benefit, therefore, if more and more of its resources are used in the production of the commodity till p becomes equal to MC. However, the profit-maximising monopolist would not set the price of its product equal to marginal cost.

For, then, it would have to operate at a point where MC = p = AR > MR => MC > MR, which would result in a loss on the marginal unit(s) of its output, and profit- maximisation would not be possible.

We may illustrate the point with the help of Fig. 11.14. Here at the MR = MC point E, the first-order condition (FOC) for maximum profit has been satisfied as also the second order condition (SOC), for at the point E, the negative slope of the MR curve is smaller than the positive slope of the LMC curve. Therefore, the monopolist’s profit-maximising price-output combination is F (p*, q*).