Question

Monopolists are price makers. Why is this not the case for firms in a competitive market?

Answer 1

In a monopoly market there is only one seller and many buyers . So there are no close substitutes available for the product . So the monopoly becomes the price maker and can decide price for its product . But in case of perfect competition or competitive market there are many firms and many buyers . Each firm selling homogeneous goods , so one firm cannot set its own price . If one firm will charge higher price than equilibrium then customers will go to other firms and hence this firm will be out of business . So here each firm is price taker . Here there are so many firms that individual firm supply is negligible .

A monopoly faces inelastic demand curve , which a competitive firm faces elastic demand curve . Also there is free entry and exit of firms in competitive market but in monopoly there are barriers in entry . So a single firm rules the market and makes monopoly profits . In competitive market there is zero economic profit in long run .