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July 7, 2015

Homework Help: Microeconomics

Posted by James on Sunday, October 29, 2006 at 10:39pm.

"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)

Under the perfect competition model, the demand curve faced by an individual producer is flat (horizontal). The assumption is that the producer is such a small player in the industry, nothing he does will affect the overall supply and thus the equilibrium price. That is, for a perfect competitor, price is given. So, price becomes marginal revenue.
Not true with a monopolist. He faces a downward demand curve, which generates a downward marginal revenue curve. Further, he can manipulate the price by adjusting his own output.

I hope this helps.

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