Question

a) Using are diagram , show the difference between a perfect competition market and a monopoly competition market over the Long term.

b) Using the information in the diagram in (a) Analyze the 5 differences that exist between a perfect competitive market and a monopoly market according to the following characteristics:

1) Price
2) Quantity
3) Good luck
4) Production efficiency
5) Efficiency of resource allocation
(Please use a curve to explain)

Answer 1

a)

b)

1) Price in monopoly is P1 while price in perfectly competitive market is P2.

2) Quantity in monopoly is Y1 while quantity in perfectly competitive market is Y2.

3) Firm in monopoly will have good luck with them while firms in perfectly competitive market will have to exit from the market.

4) Productive efficieny in perfectly competitive market occurs because they operate at the lowest point of average cost curve while monopoly does not operate at lowest point of average cost curve.

5) Monopoly does not optimize their resources or we can say there is misallocation of resources which result in deadweight loss of the society of area equal to A + B. On the other hand, perfectly competitive market use resources efficiently and pose no deadweight loss.