Market Structures: Perfect Competition and Monopoly (Features, Price-Output, Comparisons) Questions

Q: Explain long run equilibrium under perfect competition.

In long run, supernormal profits attract entry which increases supply and reduces price, while losses cause exit which reduces supply and increases price. Long run equilibrium occurs when firms earn **normal profit** and there is no incentive to enter or exit. The condition is **P = MR = MC = AC**, and the firm produces at minimum AC.

Q: Explain features of monopoly.

Monopoly has **single seller** and many buyers, with **no close substitutes** for the product. There are **strong barriers to entry** such as patents, control of resources or economies of scale. The monopolist is a **price maker** and faces a downward sloping demand curve (AR), with MR below AR.

Question 1

Define perfect competition.

Accepted Answer

Perfect competition is a market structure with many buyers and sellers, homogeneous product and free entry and exit, where firms are price takers.

Question 2

What is a price taker?

Accepted Answer

A price taker is a firm that cannot influence market price and must accept the price determined by industry demand and supply.

Question 3

Define monopoly.

Accepted Answer

Monopoly is a market structure where there is a single seller with no close substitutes and strong barriers to entry.

Question 4

State the equilibrium condition of a firm.

Accepted Answer

A firm is in equilibrium when marginal revenue equals marginal cost (MR = MC) and MC is rising.

Question 5

What is price discrimination?

Accepted Answer

Price discrimination is charging different prices to different consumers or markets for the same product, not due to cost differences.

Question 6

State any one feature of monopoly.

Accepted Answer

A major feature of monopoly is strong barriers to entry, so new firms cannot easily enter the market.

Question 7

Explain features of perfect competition.

Accepted Answer

Perfect competition has **large number of buyers and sellers** so no single firm controls price. The product is **homogeneous**, there is **free entry and exit**, and market participants have **perfect knowledge**. There are no selling costs and factors are mobile. Therefore firms are **price takers** and face AR = MR = price.

Question 8

Explain equilibrium of a firm under perfect competition in short run.

Accepted Answer

A competitive firm maximises profit where **MR = MC**. Since under perfect competition MR = price, equilibrium output is where **P = MC**. If at that output **P > AC**, firm earns supernormal profit; if **P = AC**, normal profit; if **P < AC** but **P ≥ AVC**, firm may continue in short run to minimise loss.

Question 9

Explain long run equilibrium under perfect competition.

Accepted Answer

In long run, supernormal profits attract entry which increases supply and reduces price, while losses cause exit which reduces supply and increases price. Long run equilibrium occurs when firms earn **normal profit** and there is no incentive to enter or exit. The condition is **P = MR = MC = AC**, and the firm produces at minimum AC.

Question 10

Explain features of monopoly.

Accepted Answer

Monopoly has **single seller** and many buyers, with **no close substitutes** for the product. There are **strong barriers to entry** such as patents, control of resources or economies of scale. The monopolist is a **price maker** and faces a downward sloping demand curve (AR), with MR below AR.

Question 11

Explain monopoly equilibrium and price determination.

Accepted Answer

A monopolist determines output where **MR = MC** to maximise profit. After deciding this output, the monopolist fixes price based on the **AR (demand) curve** corresponding to that output. Since AR is downward sloping and MR lies below it, monopoly price is generally higher and output lower than under perfect competition.

Question 12

Differentiate between perfect competition and monopoly.

Accepted Answer

Perfect competition has many firms, homogeneous product and free entry/exit; firms are **price takers** with AR = MR = price and long run normal profit. Monopoly has a single seller, strong entry barriers and no close substitutes; the firm is **price maker**, AR is downward sloping with MR below AR, and it can earn supernormal profits even in long run.

Question 13

Explain perfect competition. Discuss price determination and equilibrium of a firm in short run and long run.

Accepted Answer

Perfect competition is a market structure with a large number of buyers and sellers, homogeneous product, free entry and exit and perfect knowledge. Because each firm is very small relative to the market, it cannot influence price and hence is a price taker.

**Price determination:** Industry price is determined by market demand and market supply. A single firm accepts this market price. Therefore, for a competitive firm, AR = MR = Price and the firm’s demand curve is horizontal.

**Short run equilibrium:** The firm maximises profit where MR = MC. Since MR = P, equilibrium output occurs where P = MC. If at this output P > AC, the firm earns supernormal profit; if P = AC, it earns normal profit; if P < AC but P ≥ AVC, it continues in short run to minimise loss. If P < AVC, the firm shuts down.

**Long run equilibrium:** In the long run, entry and exit of firms occur. Supernormal profits attract new firms, increasing supply and reducing price. Losses cause firms to exit, reducing supply and raising price. Long run equilibrium is reached when firms earn only normal profit and there is no incentive to enter or exit. The condition is P = MR = MC = AC, and the firm produces at minimum AC.

Thus, perfect competition leads to normal profit in the long run and efficient allocation of resources.

Question 14

Explain monopoly. Discuss its features, sources of monopoly power and monopoly price-output equilibrium.

Accepted Answer

Monopoly is a market structure in which there is a single seller of a product with no close substitutes and strong barriers to entry. The monopolist has control over price because it is the only producer, but it is still limited by consumer demand.

**Features:** Monopoly has one seller and many buyers. The product has no close substitutes, and there are strong barriers to entry such as legal restrictions, control over raw materials or economies of scale. The monopolist faces a downward sloping demand curve (AR) and marginal revenue lies below average revenue.

**Sources of monopoly power:** Monopoly can arise due to patents and copyrights (legal monopoly), control over essential raw materials, natural monopoly due to economies of scale (public utilities), technological superiority and brand loyalty, and government licences.

**Monopoly equilibrium:** The monopolist maximises profit by choosing the output where MR = MC. After deciding equilibrium output, price is determined from the AR (demand) curve corresponding to that output. Because MR < AR, monopoly price is generally higher and output lower compared to perfect competition, leading to possible supernormal profits.

Hence monopoly leads to price-output decisions based on MR=MC and demand conditions.

Question 15

Compare perfect competition and monopoly and explain price discrimination under monopoly (conditions).

Accepted Answer

**Perfect competition vs Monopoly:** Under perfect competition there are many firms and free entry and exit, product is homogeneous and the firm is a price taker. AR = MR = price and in the long run firms earn only normal profit with P = MC = AC. Under monopoly there is a single seller with strong barriers to entry and no close substitutes. The monopolist is a price maker and faces downward sloping AR; MR lies below AR. Monopoly can earn supernormal profits in the long run and generally charges higher price with lower output than perfect competition.

**Price discrimination:** Price discrimination refers to charging different prices from different consumers or markets for the same product, not due to differences in cost.

**Conditions for price discrimination:**
1. **Monopoly power** so the seller can control price.
2. **Market separation**: different groups/markets can be separated.
3. **No resale** between markets (to prevent arbitrage).
4. **Different elasticities of demand** in different markets, so different prices can increase total profit.

Thus, monopoly differs sharply from perfect competition in price control and can practise price discrimination under suitable conditions.

Market Structures: Perfect Competition and Monopoly (Features, Price-Output, Comparisons)

8 more questions to unlock