Perfect Competition and Monopoly Essay Example | Topics and Well Written Essays - 2500 words

Perfect tilt and Monopoly - Essay Example1. The size of the firm relative to the trade is small. Hence, it has no influence on expense. The firm is a price taker. 2. The harvest-home is homogeneous nub to the consumer the product of one seller is same as the product of other seller. 3. There is freedom of entry and buy the farm for each firm. 4. There is free mobility of resources. 5. All the participants in the market have complete(a) k instantlyledge, meaning that everyone is mindful of his benefit, consumer knows prices, and producer knows damage and so on. If even one condition is not fulfilled, the market will not be complete anymore, it will be imperfect. An extreme case of such imperfection is monopoly. Monopoly is that market in which there is only one seller (or a group of sellers acts as one - cartel) of a good that has no close substitute. The seller has complete control of the run of the commodity and hence is the price maker. We shall now see where the equilib rium of the firm lies and also which conditions are necessary for it. Equilibrium of the firm We shall use the peripheral revenue1 and marginal equal2 approach to study the equilibrium of the firm. There are dickens conditions to this equilibrium 1. MR = MC 2. shift of MR Slope of MC. Price MC P T P MR=AR=P Quantity (output) 0 Z? Z As we quite a little see in the above graph, there are two points where marginal revenue is fitting to MC but at Z? if the quantity is increased, the firm is smooth earning profit. But after Z, the cost of per unit is more than its price. Hence Z is the equilibrium output. The equilibrium can be proved mathematically. Let Z be the output, TR the revenue and TC the cost. Profits are cipher as ? = TR TC. To maximise the profits we need i.e. MR = MC, and i.e. Slope of MR Slope of MC. Equilibrium in Perfect Competition and Monopoly in the Long Run As we are trying to see how some(prenominal) markets generate contrary profits in the long run, we s hall assume that the market demand and costs do not win over due to entry and exit of a firm from the industry. Also, to simplify the analysis constant average cost is assumed. These assumptions give us MC = AC and the supply curve for perfect competition is equal to both costs. The equilibrium in perfect competition will be at the point where demand is equal to supply as this is where the price3 will set. The output will be according to this level. At this level price will be equal to MC and AC. In general, we can state the equilibrium in perfect competition as P = AR = MR = MC = AC Where P = Price of the commodity AR = Average Revenue MR = Marginal Revenue MC = Marginal Cost AC = Average Cost4. In case of monopoly the equilibrium will take place where marginal revenue is equal to marginal cost and the marginal cost curve cuts marginal revenue from below but there is an additional article here that states that the marginal revenue will be less than the price. We can see both the e quilibriums for perfect competition and monopoly, in the figure. Comparison of Profit between Perfect Competition & Monopoly The comparison can be seen in the figure above. In perfect competition the price is fixed. Only the output varies and therefore supply curve is horizontal. The equilibrium price for competitive firm is Pc, where MR=MC. But the output level is Qc where MC= AR, meaning supply is equal to demand. For monopoly, the equilibrium position is same, where MR=MC, but the output leve