Heres one IM SURE economist will enjoy... Always saying MC = MR :)
Please help... I know its something to do with Perfectly competitive firms being price takers! right??
Question:
“In both monopoly and perfect competition the profit maximizing 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 monopoly, AR and MR curveds differ each other and both are falling. MR curve remains below the AR curve . So price is not equal to not equal to MC. But under Perfect Competion MR and AR are the identical . Hence the price and Mc is equal to each other.
Explain how demand, price elasticity and total revenue are all related to each other.please also explain this using at least two example that incorporates all three concepts
To understand the statement and the difference between monopoly and perfect competition, let's break it down and compare the two market models.
1. Monopoly:
- In a monopoly, there is a single seller or producer in the market, with no competition.
- The monopolist has the power to set prices and quantity produced to maximize their profits.
- As the monopolist increases the quantity produced, the average revenue (AR) decreases due to reduced per-unit price.
- The marginal revenue (MR) curve for a monopolist is below the AR curve because each additional unit sold lowers the overall price.
- The monopolist maximizes profit by producing the quantity at which MR equals MC.
- However, in a monopoly, the profit-maximizing output level does not necessarily result in P (price) being equal to MC (marginal cost). P could be higher than MC, leading to a situation often referred to as "monopoly power."
2. Perfect Competition:
- In perfect competition, there are many buyers and sellers in the market, and no individual participant has the power to influence the price.
- Each firm in a perfectly competitive market is a price taker, meaning it has to accept the prevailing market price.
- Both AR and MR curves for a perfectly competitive firm are horizontal and identical because the firm has no control over price.
- The perfectly competitive firm maximizes profit at the output level where MR equals MC.
- In perfect competition, the equilibrium output level is such that P (price) is equal to MC.
So, the statement you provided highlights the difference between monopoly and perfect competition in terms of the relationship between price and marginal cost. In monopoly, P is not necessarily equal to MC, while in perfect competition, P is equal to MC. This distinction arises due to the monopolist's ability to control prices versus the price-taking nature of firms in a perfectly competitive market.