9.7

• Perfect Competition:

  • In a perfectly competitive market, many firms sell identical products.
  • Firms are price takers, meaning they accept the price set by the market.
  • The firm maximizes profit by producing where Price (P) = Marginal Cost (MC).
  • Output is at the socially efficient level, meaning maximum production with no waste.
• • Monopoly:
  • A monopolist is the sole provider of a product or service in the market.
  • The monopolist sets the price, known as a price setter, and faces the entire market demand curve.
  • To maximize profit, a monopolist produces less output and charges a higher price compared to a competitive market.
• Competitive Industry:

  • The industry’s long-run marginal cost curve (LRMC) is horizontal at P₁.
  • The competitive industry produces a quantity Q₁ at price P₁, with firms operating at the lowest point on their long-run average cost (LAC) curve.
  • No firm makes supernormal profits since entry and exit of firms drive profits to zero in the long run
• Monopoly:

  • The monopolist sets marginal revenue (MR) equal to marginal cost (MC) to determine the profit-maximizing output Q₂ and price P₂.
  • Unlike in a competitive market, a monopolist restricts output and raises prices to maximize profits.
  • The higher price P₂ and lower output Q₂ reflect the monopolist's control over the market.
  • In the long run, a monopolist may even reduce output further (to Q₃) and raise prices higher (to P₃), maximizing long-run profits at the expense of social efficiency.
• the social cost of Monopoly:

  dead weight loss

  monopoly profits

  rent seeking
• Deadweight Loss:

  • In a monopoly, the restricted output and higher price create a deadweight loss. This is a loss in social welfare because some consumers who would have purchased the good at the competitive price are now priced out of the market.
  • deadweight loss is highlighted by a triangle
  • Under monopoly, there is a reduction in both consumer surplus and producer surplus, which represents the benefits to consumers and producers from market transactions.
• Monopoly Profits:

  • Monopolists earn supernormal profits (also called monopoly profits), represented by a rectangle
  • These profits persist because there is no competition to drive down prices.
• Rent-Seeking:

  • Monopolies may engage in rent-seeking behavior, where they use resources to maintain their market power rather than to improve efficiency or innovate.
  • Rent-seeking can further waste resources and reduce the overall welfare of society.
• Price Setting:

  • Unlike competitive firms, monopolists are price setters. They choose the price and quantity by equating MR to MC and selecting the corresponding price from the demand curve.
• • Output:
  • A monopolist produces less output than would be produced in a competitive market. In perfect competition, the output is at the point where P = MC, whereas the monopolist restricts output to raise prices.
• • Market Power:
  • Market power is the ability of a firm to charge a price greater than marginal cost. The less elastic the demand curve, the greater the market power of the monopolist.
• • Social Cost:
  • Monopolies lead to a social cost, primarily due to deadweight loss from producing less than the socially efficient output and charging higher prices.