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Differences between Perfect Competition and Monopoly

Here, we discuss the difference between perfect competition and monopoly in detailed as follows-

Differences between Perfect Competition and Monopoly
We have two forms of markets which can be considered extreme namely perfect competition and monopoly.
Under Perfect Competition there is no monopoly of any kind and under Monopoly there is absence of competion.
Now, we will discuss the differences between both one by one in detailed as follows-
First we discuss about Perfect Competition as follows-
  • The number of firms is very large under perfect competition such that a single firm is absolutely insignificant.
  • A firm is a very small fraction of the industry.
  • All the firms under perfect competition produce homogeneous goods.
  • A competitive firms has no power to set the price. It has to accept the price determined by the market. It is only a price taker.
  • The demand or AR curve facing a competitive firm is perfectly elastic parallel to x-axis as shown in figure-1(a)
  • A competitive firm makes only normal profit in the long run as price tends to be equal to the AC.
  • Entry into the industry is open and easy.
  • All the firms under perfect competition are of the optimum size in the long run as price = minimum AC.
  • Under perfect competition demand curve, AR curve and MR curve all coincides as AR=MR because price is given and constant as shown in figure-2(a)
  • Under perfect competition the industry attains equilibrium only in the long run when new firms do not enter into nor existing firms leave the industry.
  • Under perfect competition in the long run price tends to be equal to minimum AC and the profit of the firm is normal as shown in figure-3(a)
  • The equilibrium under perfect competition is secured when MR = MC and MC curve cuts MR curve from below, it is rising.
Now, we will discuss about Monopoly as follows-
  • The number of firm under monopoly is only one.
  • Under monopoly the single producer makes goods which has no close substitutes.
  • A monopoly firm being the only firm has power to control price. It is a price-maker and not a price-taker.
  • The demand or AR curve facing a monopolist is sloping downwards from left to right. The monopolist has to reduce price to sell more as shown in figure-1(b)
  • A monopoly firm makes abnormal profit even in the long run as monopoly price > AC.
  • There are strong barriers to the entry of new firms.
  • A monopoly firm can never be of the optimum size as the price > AC.
  • Under monopoly the demand or AR curve is sloping downwards and MR being less than AR the MR curve is below AR curve as shown in figure-2(b)
  • Under monopoly as there is only one firm, the firm itself becomes the industry. Hence the firm/industry can reach equilibrium during the long period with abnormal profit.
  • Under monopoly in the long run price is greater than AC and the monopoly firm enjoys abnormal profit as shown in figure-3(b)
  • Under monopoly the equilibrium is reached when MR = MC, whether the MC curve is falling, or constant or is rising.
Here,
MR = Marginal Revenue.
MC = Marginal Cost.
AR = Average Revenue.
AC = Average Cost.
Differences between Perfect Competition and Monopoly
The number of firms is very large under perfect competition
All the firms under perfect competition produce homogeneous goods
It is only a price taker
Entry into the industry is open and easy
The number of firm under monopoly is only one
Under monopoly the single producer makes goods which has no close substitutes
Monopoly firm is a price-maker
There are strong barriers to the entry of new firms
Differences between Perfect Competition and Monopoly
Kinnari
Tech writer at NewsandStory
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