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Monopoly and Perfect Competition | Markets | Economics

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The upcoming discussion will update you about the differences between monopoly and perfect competition.

The monopoly will make profits in excess of those merely neces­sary to keep in business, and no pressure exists for price to fall and reduce these. Under monopoly, prices are higher and output lower than they would be under Perfect Competition. The power of the monopolist derives from the fact that demand for his product is not perfectly elastic, so that when price rises, sales largely hold up.

This is not so for a perfect competitor, who will sell nothing if he raises his price even a fraction above the going rate. The degree of monopoly power a firm enjoys can be measured by how inelastic demand for its product is. The more inelastic demand is, the more the monopoly can raise its prices without losing sales.

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The following are the main points of distinction between monopoly and perfect competition:

1. One Firm vs. Many Firms:

In a monopoly market a single firm produces or sells a particular product. But under perfect competition a large number of firms produce or supply an identical product.

2. Absolute Control Over Market Supply vs. Absence of Control Over Market Supply:

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As a monopolist is the sole producer or supplier of a product, he has an absolute control over the market supply. But under perfect competition, a single firm supplies only a negligible portion of the total market supply; it has no control over the market supply.

3. A Price-Maker vs. a Price-Taker:

As a monopolist has an absolute control over the market supply, he can make or change the market price through the variation in his own supply. An increase of supply causes a rise in the price. So the average revenue curve of a monopolist has a downward slope to the right.

But under perfect competition an individual firm has no control over the market supply and market price and so it has to sell all the units of its output at the same market price and is simply a price-taker. Accordingly, the average revenue curve of a competitive firm is a horizontal straight line parallel to the quantity axis.

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4. Relation between Price and MR:

As the AR curve of a monopolist has a downward slope, under monopoly P or AR>MR. But under perfect competition as the AR curve is a horizontal straight line, the P or AR=MR.

5. Relationship between Price and MC:

Under monopoly, the firm produces an output up to the amount at which MC-MR; but here P>MR, so in equilibrium position P>MC. Similarly under perfect competition a profit-seeking firm produces and sells an output at which MC=MR; but here P>MR, so in equilibrium position P>MC. Under perfect competition a firm produces an output at which MC=MR, P=MR. So inequality P=MC.

6. No Free Entry vs. Free Entry:

Under monopoly no new firms can enter into the industry, but under perfect competition new firms can do the same in the long run.

7. Super-Normal Profit vs. Normal Profit:

Under monopoly the firm can enjoy super-normal profit even in the long run, for the monopoly price may become greater than the AC. But under perfect competition, in the long run, a firm gets only the normal profit as P becomes equal to AC.

8. Equilibrium under all MC Conditions vs. Equilibrium under rising MC:

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Monopoly equilibrium is compatible with both rising or falling MC. But the competitive equilibrium is possible only under rising MC.

9. Excess Capacity vs. Optimum Capacity:

Monopoly equilibrium is attained before the firm reaches its optimum capacity, e.g., the level of the lowest AC. It creates an un-utilised capacity in the monopoly firm and makes the monopoly output smaller than the competitive output is ON. So, under the same cost and demand conditions, the monopoly output is less than competitive output. But under perfect competition P = MC.

It shows that under the same cost and demand conditions the monopoly price is higher than the competitive price. Besides, a monopolist can charge different prices for the same product from the different buyers at the same time, but a competitive seller cannot do so.

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