Cambridge International as and a level Economics Ebook

Comparing monopoly with perfect 
competition
Figure 7.21
shows the equilibrium price and output of 
a monopolist charging a single price in a market free 
of government intervention and what would occur in a 
perfectly competitive industry.
Th
e classic case against a monopoly is that its conduct 
and performance is undesirable when compared with 
that of fi rms in more competitive markets. Th
e following 
observations can be made comparing the two equilibrium 
positions:
■ 
The price in monopoly is higher than it is in perfect 
competition.
■ 
The monopoly output is lower.
■
The monopolist is making short- and long-run abnormal 
profits.
■ 
The firm in perfect competition is productively eff icient, 
producing the optimum output.
■ 
It is also allocatively eff icient, producing where price 
=
MC.
■ 
The monopolist captures consumer surplus and turns it into 
abnormal profit.
■ 
The monopolist is productively ineff icient, producing less 
than the optimum output in the search for extra profit.
■ 
The price charged is well above marginal cost and so is not 
allocatively eff icient.
■ 
If a perfectly competitive industry was turned into a 
monopoly, there would be a welfare loss of area 
x
in 
addition to greater allocative ineff iciency.
Figure 7.20 
Natural monopoly
P
1
P
2
0
Costs and Price
Quantity
Q
1
MR
LRMC
LRAC
Abnormal profit
Subsidy for private
monopoly
Q
2
Output
0
Cost and r
evenue
MC (Industry S curve)
D = AR = MR = MC = AC
ATC
D = AR
MQ
PCQ
MR
MP d
PCP b
MC = MR
e
a
c
Monopoly price and
output equilibrium
Perfect comp price and
output equilibrium
Deadweight loss
x