Question

Why is perfect competition better than a monopoly?

Answer 1

It is better for the consumers because they will have access to more quantities of the good for a lower price.

Explanation:

The price in perfect competition is always lower than the price in the monopoly and any company will maximize its economic profit (`pi`) when Marginal Revenue(MR) = Marginal Cost (MC).

In perfect competition, price (P) = MR = Average Revenue (AR). Since Max `pi` occurs when `MC=MR`, MR is the price that will be charged. In the long run, `pi` `=0`, but, in the short run, `pi` can be either positive or negative.

The company in the monopoly has a monopoly power and can set a markup to have a positive value for `pi`. That way, `MR != AR`, but `P=AR`. MR has the same intercept as the price curve but twice its inclination, so this company will find the point where `MC=MR` and charge the price that corresponds to that value of MR.

You can plot these curves in a graph with quantities in the horizontal axis and P, MC and MR in the vertical axis and use an inverted demand function to make the tests.

The inverted demand function is: `P=a-bQ` and Total Revenue (TR) `=P*Q`.