Distinguish between Perfect Competition and Monopoly. Show the equilibrium of a firm under conditions of perfect competition in the short run and long run.
Points of difference between Monopoly and Perfect competition are as follows :
There are large number of buyers and sellers in the perfectly competitive market whereas there is only one seller and large number of buyers in monopoly.
Products are homogeneous in perfect competition whereas there is no substitute for the monopolists product. There’s complete absence of competition under monopoly.
Perfectly competitive firms are price -takers whereas a monopolist is a price maker.
Under perfect competitive, there is efficient allocation of resources & keeps pressure on producer to keep production cost down. In contrast, monopoly results in restriction of output, higher production cost & unproductive expenses.
No barriers to entry and exist under perfect competition whereas under monopoly there night be barriers or no barriers in long run.
Under perfect competition, profit in the SR attract new firms to join industry which complete away profits in the LR. Whereas, under monopoly, profits are present in LR when there are effective barriers. If barriers are weak, firm all cease to be a monopolist.
SHORT RUN- EQUILIBRIUM
Under perfect competition all firms don’t earn profits. In terms of short-term profitability operating firms can be classified into three broad categories:
- Firms earning profits : Firms earn profits when its average cost is lower than its price/average revenue.
- Firms first break-even : In the SR, there are some firms which earn only normal profits. There are some firms which just break-even.
- Firms making profits : Firms suffer losses when their SRAC is higher then price. For such firms price exceeds their average variable cost.
LONG RUN EQUILIBRIUM:
Firms in perfect competition in long run only break-even or earn zero profits. No firms has an incentive to exist in this situation. As firms are earning zero profits in breaking even situation, there’s no incentive to enter the industry either.