"In both monopoly and perfect competition the profit maximising output is at the level at which MR = MC, but only in the latter is the optimum output level such that P = MC"
Explain the above statement by comparing the model of perfect competition with that of monopoly.
Thanks :o)
See my post above.
The statement refers to two different market structures: perfect competition and monopoly. In perfect competition, there are many firms competing against each other, while in a monopoly, there is only one dominant firm in the market.
In both perfect competition and monopoly, firms aim to maximize profits. The profit-maximizing output level is determined by setting marginal revenue (MR) equal to marginal cost (MC). Marginal revenue is the additional revenue gained from selling one more unit of output, while marginal cost is the additional cost incurred to produce one more unit. By equating MR and MC, firms ensure that producing an additional unit of output generates the same additional revenue as it costs.
However, the statement highlights a key difference between the two market structures. In perfect competition, the optimal output level is such that the market price (P) is equal to marginal cost (MC). This condition occurs because in perfect competition, there are many firms producing identical products, and they are price takers, meaning they have no control over the market price. Therefore, to maximize profit, they set their output level where the price equals their marginal cost.
On the other hand, in a monopoly, the firm has market power, meaning it can influence the market price. A monopolistic firm faces a downward-sloping demand curve because it is the sole supplier of the product. This allows the firm to charge a price above the marginal cost, maximizing its profit. Hence, while the profit-maximizing output is still determined by equating marginal revenue and marginal cost (MR = MC), the market price (P) will be higher than the marginal cost (P > MC) in a monopoly.
To summarize, in both perfect competition and monopoly, firms aim to maximize profit by setting MR = MC. However, the optimal output level is such that P = MC only in perfect competition, where firms are price takers, while in monopoly, the market price is higher than the marginal cost.