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Answers
Following points make clear difference between both the competitions:
1. Output and Price:
Under perfect competition price is equal to marginal cost at the equilibrium output. While under monopoly, the price is greater than average cost.
2. Equilibrium:
Under perfect competition equilibrium is possible only when MR = MC and MC cuts the MR curve from below. But under simple monopoly, equilibrium can be realized whether marginal cost is rising, constant or falling.
3. Entry:
Under perfect competition, there exist no restrictions on the entry or exit of firms into the industry. Under simple monopoly, there are strong barriers on the entry and exit of firms.
4. Discrimination:
Under simple monopoly, a monopolist can charge different prices from the different groups of buyers. But, in the perfectly competitive market, it is absent by definition.
5. Profits:
The difference between price and marginal cost under monopoly results in super-normal profits to the monopolist. Under perfect competition, a firm in the long run enjoys only normal profits.
6. Supply Curve of Firm:
Under perfect competition, supply curve can be known. It is so because all firms can sell desired quantity at the prevailing price. Moreover, there is no price discrimination. Under monopoly, supply curve cannot be known. MC curve is not the supply curve of the monopolist.
7. Slope of Demand Curve:
Under perfect competition, demand curve is perfectly elastic. It is due to the existence of large number of firms. Price of the product is determined by the industry and each firm has to accept that price. On the other hand, under monopoly, average revenue curve slopes downward. AR and MR curves are separate from each other. Price is determined by the monopolist
8. Goals of Firms:
Under perfect competition and monopoly the firm aims at to maximize its profits. The firm which aims at to maximize its profits is known as rational firm.
9. Comparison of Price:
Monopoly price is higher than perfect competition price. In long period, under perfect competition, price is equal to average cost. In monopoly, price is higher as is shown in Fig. 11. The perfect competition price is OP1, whereas monopoly price is OP. In equilibrium, monopoly sells ON output at OP price but a perfectly competitive firm sells higher output ON1 at lower price OP1.
10. Comparison of Output:
Perfect competition output is higher than monopoly price. Under perfect competition the firm is in equilibrium at point M1 (As shown in Fig. 11 (a)), AR = MR = AC = MC are equal. The equilibrium output is ON1. On the other hand monopoly firm is in equilibrium at point M where MC=MR. The equilibrium output is ON. The monopoly output is lower than perfectly competitive firm output.
The basic differences between perfect competition and monopolistic competition are indicated in the following points:
- A market structure, where there are many sellers selling similar goods to the buyers, is perfect competition. A market structure, where there are numerous sellers, selling close substitute goods to the buyers, is monopolistic competition.
- In perfect competition, the product offered is standardised whereas in monopolistic competition product differentiation is there.
- In perfect competition, the demand and supply forces determine the price for the whole industry and every firm sells its product at that price. In monopolistic competition, every firm offers products at its own price.
- Entry and Exit are comparatively easy in perfect competition than in monopolistic competition.
- The slope of the demand curve is horizontal, which shows perfectly elastic demand. On the other hand, in monopolistic competition, the demand curve is downward sloping which represents the relatively elastic demand.
- Average revenue (AR) and marginal revenue (MR) curve coincide with each other in perfect competition. Conversely, in monopolistic competition, average revenue is greater than the marginal revenue, i.e. to increase sales the firm has to lower down its price.
- Perfect competition is an imaginary situation which does not exist in reality. Unlike, monopolistic competition, that exists practically.
A..Following points make clear difference between both the competitions:
1. Output and Price:
Under perfect competition price is equal to marginal cost at the equilibrium output. While under monopoly, the price is greater than average cost.
2. Equilibrium:
Under perfect competition equilibrium is possible only when MR = MC and MC cuts the MR curve from below. But under simple monopoly, equilibrium can be realized whether marginal cost is rising, constant or falling.
3. Entry:
Under perfect competition, there exist no restrictions on the entry or exit of firms into the industry. Under simple monopoly, there are strong barriers on the entry and exit of firms.
4. Discrimination:
Under simple monopoly, a monopolist can charge different prices from the different groups of buyers. But, in the perfectly competitive market, it is absent by definition.
5. Profits:
The difference between price and marginal cost under monopoly results in super-normal profits to the monopolist. Under perfect competition, a firm in the long run enjoys only normal profits.
6. Supply Curve of Firm:
Under perfect competition, supply curve can be known. It is so because all firms can sell desired quantity at the prevailing price. Moreover, there is no price discrimination. Under monopoly, supply curve cannot be known. MC curve is not the supply curve of the monopolist.
7. Slope of Demand Curve:
Under perfect competition, demand curve is perfectly elastic. It is due to the existence of large number of firms. Price of the product is determined by the industry and each firm has to accept that price. On the other hand, under monopoly, average revenue curve slopes downward. AR and MR curves are separate from each other. Price is determined by the monopolist. It has been shown in Figure 10.
Price Determination by Monopolist under Perfect Competition
8. Goals of Firms:
Under perfect competition and monopoly the firm aims at to maximize its profits. The firm which aims at to maximize its profits is known as rational firm.
9. Comparison of Price:
Monopoly price is higher than perfect competition price. In long period, under perfect competition, price is equal to average cost. In monopoly, price is higher as is shown in Fig. 11. The perfect competition price is OP1, whereas monopoly price is OP. In equilibrium, monopoly sells ON output at OP price but a perfectly competitive firm sells higher output ON1 at lower price OP1.
Price in Monopoly Market
10. Comparison of Output:
Perfect competition output is higher than monopoly price. Under perfect competition the firm is in equilibrium at point M1 (As shown in Fig. 11 (a)), AR = MR = AC = MC are equal. The equilibrium output is ON1. On the other hand monopoly firm is in equilibrium at point M where MC=MR. The equilibrium output is ON. The monopoly output is lower than perfectly competitive firm output.
B.Monopoly refers to a market structure where a single seller produces/sells product to large number of buyers.
Monopolistic competition is a competitive market setting wherein there are many sellers who offer differentiated products to a large number of buyers.
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