"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.

Certainly! Let's break down the statement and compare the models of perfect competition and monopoly.

1. Profit Maximizing Output:
In both perfect competition and monopoly, the profit maximizing output occurs at the level where marginal revenue (MR) equals marginal cost (MC). This is because at this output level, the additional revenue generated from producing one more unit (MR) is equal to the additional cost incurred in producing that unit (MC).

2. Optimum Output Level:
However, there is a difference between the two models when it comes to the optimum output level in relation to price. In perfect competition, the optimum output level occurs when price (P) is equal to marginal cost (MC). This means that the price charged by the producer perfectly reflects the cost of producing each unit.

On the other hand, in a monopoly, the optimum output level is such that the price charged (P) exceeds the marginal cost (MC). Monopolists face a downward-sloping demand curve, which means that as they increase their output, the price they can charge decreases. As a result, monopolists can manipulate the price by adjusting their own output, leading to a situation where the price is higher than the marginal cost.

To summarize, in perfect competition, the equilibrium price is equal to the marginal cost, ensuring allocative efficiency. However, in monopoly, the monopolist can set prices above the marginal cost, resulting in a less efficient allocation of resources.

I hope this clarifies the statement! Let me know if you have any further questions.