Comparing the monopolist and perfect competition

Comparing the monopolist and perfect competition

perfectly-and-monopolistically-competitive

If we assume that the perfectly competitive firm and the monopolist share the same cost curves (average cost and marginal cost) we can compare the output and efficiency levels of the two firms.

• The monopolist makes super-normal profit equal to the area PmCmba, by operating at the profit maximising point.
• The monopolist is not productively efficient as the profit maximising level of output (Qm) does not maximise economies of scale, which occur at the minimum point of the AC curve ie the point C.
• The monopolist is not allocatively efficient because P (AR) is not equal to MC (necessary condition for allocative efficiency). Note: AR is greater than MC at an output of Qm.
• Perfectly competitive firms operate where AC=AR and where MC=MR. This occurs on the AR curve marked for the perfectly competitive firm, (AR=MR=D for PC). At the point C the firm is profit maximising.
• A perfectly competitive firm is also allocatively efficient because P=MC.
• A perfectly competitive firm is also productively efficient, operating at the lowest point of its average cost curve.
• Consumer surplus is reduced by the monopolist. A perfectly competitive firm will have consumer surplus equal to Ppcfc whilst the monopolist by raising price is able to reduce consumer surplus to Pmfa.
• Under perfect competition output is greater at Qpc and price is lower at Ppc than if the firm were to operate as a monopoly (Qm & Pm), allowing them to make normal profits.
• Deadweight welfare loss from the firm operating as a monopolist is equal to ade.

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