posted by James on .
"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.
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.