Perfect Competition versus Monopoly
Large numbers of sellers exist under perfect competition. As a result, individual firms do not have any control over price. The firm is a price - taker as the forces of demand and supply establish market price. The firm has to decide about the output, it should produce at the going price. On the contrary, single firm is the sole producer of a good under monopoly. Thus, the firm is the industry. The industry supply curve is similar to the supply curve of the individual firm. Therefore, a monopolist is a price-maker.
The long run price under perfect competition is driven down to the lowest sustainable level, where economic profits are zero. As a result, a competitive market delivers maximum benefit to the consumers. On the other hand, monopolist sets a high price by restricting output below the competitive level. Comparisons between the two can be made graphically. In Fig. 7.7 equilibrium takes place where MR = MC Ep and EM are the equilibrium levels of a perfectly competitive market and monopoly respectively. Pp is the market price of a perfect competitor and PM is the price set by the monopolist. The diagram shows that the perfectly competitive price is increased till becomes equal to marginal cost, i.e., Pp = MC But monopolist restricts output, therefore PM > MC For this reason, the price set by the monopolist is said to be higher than the socially desirable level. Hence competition is regarded to deliver output at a minimum price.
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