Question

Explain in your own words the basic differences between perfect competitors and monopolies.

Answer 1

Perfect competition is the form of market where there are a large number of firms in the economy selling homogeneous products and no single firm has the power to influence the market price. Thus, each firm is a price taker.

There is free entry and exit in the industry which results in firms earning normal profits in the long run.

Equilibrium in a perfectly competitivw economy is attained at a point where P= MC.

On the other hand, monopoly is the form of market where there is only one firm in the market with all the market power, and hence he is the price maker of his product.

There are restrictions to entry in the market (via patents, copyrights etc.) which results in the firm earning abnormal profits even in the long run.

The equilibrium in such a market is given at a point where: MR= MC