Introduction
Monopoly and Perfect Competition are two extreme forms of market structures in economics. While Perfect Competition represents a market with many sellers and buyers dealing in identical products, Monopoly stands for a market where a single seller dominates with no close substitutes. Understanding the differences between these two market structures helps us understand how markets function and how prices and output are determined. This answer also discusses the long-run equilibrium under Monopoly.
Differences Between Monopoly and Perfect Competition
| Feature | Perfect Competition | Monopoly |
|---|---|---|
| Number of Sellers | Large number of small firms | Single seller |
| Nature of Product | Homogeneous (identical) | Unique product without close substitutes |
| Entry and Exit | Free entry and exit | Barriers to entry exist |
| Price Control | Firms are price takers | Firm is a price maker |
| Demand Curve | Perfectly elastic (horizontal) | Downward sloping |
| Profit in Long Run | Only normal profit due to free entry | Can earn supernormal profit due to entry barriers |
Long-Run Equilibrium under Monopoly
In the long run, a monopolist can continue to earn supernormal (economic) profits because there are significant barriers to the entry of new firms. These barriers could be legal (like patents), technical (large-scale economies), or strategic (like exclusive ownership of raw materials).
Equilibrium Condition:
- The monopolist maximizes profit where Marginal Revenue (MR) = Marginal Cost (MC).
- At this point, the difference between Total Revenue (TR) and Total Cost (TC) is maximized.
- Since the monopolist faces a downward sloping demand curve, MR is less than Price (P).
Graphical Explanation:
In the long run, the monopolist will produce at the quantity where MR = MC and will charge a price based on the demand curve at that quantity. This price is higher than the marginal cost, which indicates a markup over cost and results in supernormal profits.
Key Characteristics of Long-Run Monopoly Equilibrium:
- Supernormal Profits: Due to barriers to entry, new firms cannot enter to compete away profits.
- No Supply Curve: There is no unique relationship between price and quantity in monopoly, so a supply curve cannot be defined.
- Inefficiency: Monopoly leads to allocative inefficiency (P > MC) and productive inefficiency (not producing at minimum average cost).
- Deadweight Loss: Due to restricted output and higher prices, monopoly results in welfare loss to society.
Comparison of Equilibrium
- In perfect competition, P = MC in long run, ensuring efficiency.
- In monopoly, P > MC in long run, indicating underproduction and higher prices.
Conclusion
Monopoly and Perfect Competition are fundamentally different in their structure and outcomes. While perfect competition leads to optimal allocation of resources and only normal profits in the long run, monopoly restricts output, charges higher prices, and earns supernormal profits. The long-run equilibrium under monopoly is less efficient from the viewpoint of society due to the absence of competitive pressure. Understanding these differences is key to analysing market behaviour and the need for regulation in certain industries.