Question

How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?

Short answer

In conclusion, a monopolist generally produces a lower quantity (Qm) and charges a higher price (Pm) compared to a perfectly competitive firm, which produces a higher quantity (Qc) at a lower price (Pc). This difference is due to the monopolist's market power and its ability to set a profit-maximizing price, while perfectly competitive firms must accept the market-determined price and focus on producing at the minimum average total cost to maximize profits.

Step-by-step solution

Understanding Monopoly and Perfect Competition

A monopoly is a market structure in which there is only one firm producing a unique product with no close substitutes, and there are barriers to entry that prevent new firms from entering the market. In contrast, perfect competition is a market structure where there are many firms producing identical products, and there are no barriers to entry, allowing new firms to enter the market freely.

Monopoly's Price and Output Decision

A monopolist has the power to set the price for its product. It does this by choosing the level of output that maximizes its profit, which occurs when its marginal cost (MC) equals its marginal revenue (MR). At this point, the quantity produced by the monopolist (Qm) and the price charged (Pm) will be determined. Using the market demand curve, the monopolist can determine the number of units (Qm) consumers are willing to purchase at the profit-maximizing price. \[ Q_m: MR = MC \] \[ P_m: find \ the\ price\ from \ the\ demand \ curve\ at Q_m \]

Perfect Competition's Price and Output Decision

In a perfectly competitive market, firms have no control over the price and accept the market-determined price (Pc) as given. Firms produce the level of output (Qc) where their marginal cost (MC) equals the market price. \[ P_c: determined\ by\ market\ forces \] \[ Q_c: MC = P_c \] In the long run, firms in a perfectly competitive market produce at the minimum point of the average total cost (ATC) to maximize their profits.

Comparing Monopoly and Perfect Competition

We can compare the quantity produced and the price charged in both market structures by looking at the profit-maximizing conditions: Quantity produced: - Monopoly: Qm, where MR = MC - Perfect Competition: Qc, where MC = Pc Price charged: - Monopoly: Pm, determined from the demand curve at Qm - Perfect Competition: Pc, determined by market forces In general, a monopolist produces a lower quantity (Qm) compared to a perfectly competitive firm (Qc). The reason is that the monopolist restricts the output to increase the product's price and maximize its profit. On the other hand, a perfectly competitive firm focuses on producing at the minimum point of the average total cost to maximize profits. Regarding the price charged, a monopolist charges a higher price (Pm) than a perfectly competitive firm (Pc). The monopolist has the power to set the price for its product, whereas the perfectly competitive firm must accept the market-determined price. In conclusion, a monopolist produces a lower quantity and charges a higher price compared to a perfectly competitive firm due to the differences in their market power and the profit-maximization strategies they employ.