Q1) Assess the differences and the similarities in characteristics, pricing and

output between perfect competition and monopolistic competition. [12]

Perfect competition is a market structure in which there are numerous

sellers in the market, selling similar goods that are produced/manufactured
using a standard method and each firm has all information regarding the
market and price, which is known as a perfectly competitive market. 
Monopolistic competition is a type of imperfect market structure. In a
monopolistic competition structure, a number of sellers sell similar products
but not identical products. Products or services offered by sellers are
substitutes of each other with certain differences. A market can be
described as a place where buyers and sellers meet, directly or through a
dealer for transactions in a competitive market the number of buyers and
sellers are large. The price is determined by the industry keeping in view
the aggregate demand and aggregate supply. The firms are price taker and
output adjuster. Under Monopoly there is no difference between firm and
industry. Firm itself is an industry. The firm determines the price and output.
In perfect competition Price = MC; in monopoly P > MC. Under perfect
competition the individual firm’s output is a small part of the total output.
Variation of its output has no effect on prices and therefore marginal
revenue is equal to price. But the Monopolist competition is by definition the
sole producer. Therefore, if he wants to sell more he must reduce the price.
Hence, under Monopoly the marginal revenue is less than price. The
supply curve of a firm under perfect competition is perfectly elastic. The
individual firm under perfect competition has an insignificant part of the
industry and variation of its output does not affect prices. Therefore, he can
sell as much or as little of his output as he chooses at the current price The
average revenue curve of the individual firm under perfect competition is
therefore a straight line parallel to the X-axis. But the monopolist is the
sole-producer. Therefore, variation of his output will cause variation in
prices. The average revenue curve of the monopolist is a downwards
sloping curve. Under Perfect Competition, price equals marginal cost, while
under Monopoly price exceeds marginal cost. There is an exception to the
rule that Monopoly price is higher than competitive price. There may be a
commodity with a very steeply decreasing cost curve and a highly elastic
demand. In such a case, Monopolist will make maximum gain by selling it
at a price which is lower than what the price would be under competition.
This is however, a highly improbable situation. The Monopoly output may
be higher than the competitive output in the case of a commodity having a
steeply decreasing cost curve and a highly elastic demand The monopolist
restricts output, increases price to maximize his profits and hold price
above the marginal cost and marginal revenue. Whereas the perfect
competition leads to maximum allocation of resources and produces more
than Monopoly. Under Perfect Competition, the firm in the long-run makes
normal profit. Under Monopoly, the firm gets super-natural profits. From the
facts stated above we can say that Monopoly leads to an inefficient
allocation of resources from the economy point of view.The monopolist
restricts output, increases price to maximize his profits and hold price
above the marginal cost and marginal revenue. Whereas the perfect
competition leads to maximum allocation of resources and produces more
than Monopoly. However In both the market situations, firms can earn
super normal profits or incur losses in the short period. But in the long
period, firms earn only normal profit. In both, the equilibrium is established
at the point of equality of marginal cost and marginal revenue.
Q2) Consider whether it is true that prices are always higher and output always
lower under monopoly conditions than they are under perfectly competitive
conditions. [13]
Market conduct and performance in atomistic industries provide standards
against which to measure behavior in other types of industry. The atomistic
category includes both perfect competition and monopolistic competition. In
perfect competition, a large number of small sellers supply a homogeneous
product to a common buying market. In this situation no individual seller
can perceptibly influence the market price at which he sells but must accept
a market price that is impersonally determined by the total supply of the
product offered by all sellers and the total demand for the product of all
buyers. The large number of sellers precludes the possibility of a common
agreement among them, and each must therefore act independently. At
any going market price, each seller tends to adjust his output to match the
quantity that will yield him the largest aggregate profit, assuming that the
market price will not change as a result. But the collective effect of such
adjustments by all sellers will cause the total supply in the market to
change significantly, so that the market price falls or rises the process will
go on until a market price is reached at which the total output that sellers
wish to produce is equal to the total output that all buyers wish to purchase
A market can be structured differently depending on the characteristics of
competition within that market. At one extreme is perfect competition. In a
perfectly competitive market, there are many producers and consumers, no
barriers to enter and exit the market, perfectly homogeneous goods, perfect
information, and well-defined property rights. This produces a system in
which no individual economic actor can affect the price of a good – in other
words, producers are price takers that can choose how much to produce,
but not the price at which they can sell their output. In reality there are few
industries that are truly perfectly competitive, but some come very close.
For example, commodity markets (such as coal or copper) typically have
many buyers and multiple sellers. There are few differences in quality
between providers so goods can be easily substituted, and the goods are
simple enough that both buyers and sellers have full information about the
transaction. It is unlikely that a copper producer could raise their prices
above the market rate and still find a buyer for their product, so sellers are
price takers. A monopoly, on the other hand, exists when there is only one
producer and many consumers. Monopolies are characterized by a lack of
economic competition to produce the good or service and a lack of viable
substitute goods. As a result, the single producer has control over the price
of a good – in other words, the producer is a price maker that can
determine the price level by deciding what quantity of a good to produce.
Public utility companies tend to be monopolies. In the case of electricity
distribution, for example, the cost to put up power lines is so high it is
inefficient to have more than one provider. There are no good substitutes
for electricity delivery so consumers have few options. If the electricity
distributor decided to raise their prices it is likely that most consumers
would continue to purchase electricity, so the seller is a price maker. In
traditional economics, the goal of a firm is to maximize their profits. This
means they want to maximize the difference between their earnings, i.e.
revenue, and their spending, i.e. costs. To find the profit maximizing point,
firms look at marginal revenue (MR) – the total additional revenue from
selling one additional unit of output – and the marginal cost (MC) – the total
additional cost of producing one additional unit of output. When the
marginal revenue of selling a good is greater than the marginal cost of
producing it, firms are making a profit on that product. This leads directly
into the marginal decision rule, which dictates that a given good should
continue to be produced if the marginal revenue of one unit is greater than
its marginal cost. Therefore, the maximizing solution involves setting
marginal revenue equal to marginal cost. This is relatively straightforward
for firms in perfectly competitive markets, in which marginal revenue is the
same as price. Monopoly production, however, is complicated by the fact
that monopolies have demand curves and MR curves that are distinct,
causing price to differ from marginal revenue.
Monopoly and perfect competition mark the two extremes of market
structures, but there are some similarities between firms in a perfectly
competitive market and monopoly firms. Both face the same cost and
production functions, and both seek to maximize profit. The shutdown
decisions are the same, and both are assumed to have perfectly
competitive factors markets. However, there are several key distinctions. In
a perfectly competitive market, price equals marginal cost and firms earn
an economic profit of zero. In a monopoly, the price is set above marginal
cost and the firm earns a positive economic profit. Perfect competition
produces an equilibrium in which the price and quantity of a good is
economically efficient. Monopolies produce an equilibrium at which the
price of a good is higher, and the quantity lower, than is economically
efficient. For this reason, governments often seek to regulate monopolies
and encourage increased competition. Monopolies can influence a good’s
price by changing output levels, which allows them to make an economic
profit. Monopolies, unlike perfectly competitive firms, are able to influence
the price of a good and are able to make a positive economic profit. While a
perfectly competitive firm faces a single market price, represented by a
horizontal demand/marginal revenue curve, a monopoly has the market all
to itself and faces the downward-sloping market demand curve. An
important consequence is worth noticing: typically a monopoly selects a
higher price and lesser quantity of output than a price-taking company