📚 Perfect Competition vs. Monopoly: Long-Run Profit Differences
In economics, understanding market structures is crucial. Two fundamental market structures are perfect competition and monopoly. One key difference lies in their long-run profitability, specifically relating to the relationship between price (P) and average total cost (ATC).
🎯 Definition of Perfect Competition
Perfect competition is a market structure characterized by many buyers and sellers, identical products, free entry and exit, and perfect information. No single firm can influence the market price; they are price takers.
🥇 Definition of Monopoly
A monopoly, on the other hand, is a market structure where a single firm dominates the entire market. The monopolist has significant control over the price and faces no direct competition.
📊 Comparison Table: Perfect Competition vs. Monopoly (Long-Run Profit)
| Feature |
Perfect Competition |
Monopoly |
| Number of Firms |
Many |
One |
| Product Differentiation |
Homogeneous (Identical) |
Unique (No Close Substitutes) |
| Entry Barriers |
None |
High |
| Price Control |
None (Price Taker) |
Significant (Price Maker) |
| Long-Run Profit |
Zero Economic Profit ($P = ATC$) |
Potential for Positive Economic Profit ($P > ATC$) |
| Efficiency |
Allocatively and Productively Efficient |
Allocatively Inefficient |
🔑 Key Takeaways
- 📉 Perfect Competition:
- ⚖️ In the long run, firms in perfect competition earn zero economic profit. This is because if firms are making positive economic profits, new firms will enter the market, increasing supply and driving down the price until $P = ATC$.
- 💡 Firms produce at the minimum point of their average total cost curve.
- 📈 Monopoly:
- 🛡️ Monopolies can sustain positive economic profits in the long run due to high barriers to entry. These barriers prevent new firms from entering the market and competing away the monopolist's profits.
- 💰 The monopolist produces where marginal revenue (MR) equals marginal cost (MC), and sets the price according to the demand curve. Because the demand curve is above the ATC at this quantity $P > ATC$, they can continue to make profit.
- 🚫 Monopolies cause deadweight loss because they restrict output and charge higher prices than in competitive markets.