(iv) The firm is in long-run equilibrium at the point where AC curve is still declining and has not reached the minimum point. (iv) The firm is in long-run equilibrium at the minimum point of the long-run AC curve. (iii) In equilibrium position, the price charged by the firm is above MC. (iii) In equilibrium position, the price charged by the firm equals to MC. (ii) The firm is in equilibrium at the level of output where MC is equal to MR. Since in perfect competition MR is equal to AR or price, therefore, when MC is equal to MR, it is also equal to AR or price at the equlibrium position, i.e., MC=MR=AR (Price)

(i) The demand curve or average revenue curve is relatively elastic and a downward sloping from left to right. (i) The demand curve or average revenue curve is perfectly elastic and is a horizontal straight line. The key points of comparison of price determination under Perfect Competition and Monopoly is as below: In the short run, the monopolist has to keep an eye on the variable cost, otherwise he will stop producing. In the long run, the monopolist can change the size of plant in response to a change in demand. In the long run, he will make adjustment in the amount of the factors, fixed and variable, so that MR equals not only to short run MC but also long run MC.ĬOMPARISON OF PRICE DETERMINATION UNDER PERFECT COMPETITION AND MONOPOLY: It can be seen from the diagram that up till OM output, marginal revenue is greater than marginal cost, but beyond OM the marginal revenue is less than marginal cost. Therefore, the monopolist will be in equilibrium at output OM where marginal revenue is equal to marginal cost and the profits are the greatest. The corresponding price in the diagram is MP’ or OP. It can be seen from the diagram at output OM, while MP’ is the average revenue, ML is the average cost, therefore, P’L is the profit per unit. Now the total profit is equal to P’L (profit per unit) multiply by OM (total output). The Equilibrium level in monopoly is that level of output in which marginal revenue equals marginal cost. The producer will continue producer as long as marginal revenue exceeds the marginal cost. At the point where MR is equal to MC the profit will be maximum and beyond this point the producer will stop producing. PRICE-OUTPUT DETERMINATION UNDER MONOPOLY:Ī firm under monopoly faces a downward sloping demand curve or average revenue curve. Further, in monopoly, since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue. In other words, under monopoly the MR curve lies below the AR curve. (ii) No Close Substitute: The commodity produced by the producer must have no closely competing substitutes, if he is to be called a monopolist. This ensures that there is no rival of the monopolist. Therefore, the cross elasticity of demand between the product of the monopolist and the product of any other producer must be very low. (i) Single Producer: There must be only one producer who may be an individual, a partnership firm or a joint stock company. Thus single firm constitutes the industry. The distinction between firm and industry disappears under conditions of monopoly. Monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitute.įrom this definition there are two points that must be noted:

Different types of monopoly economics