Perfect competition and monopoly: features and price-output determination

1. Market and market forms

A market in economics is not a place but the whole set of arrangements by which buyers and sellers of a commodity are in contact and settle its price. Markets are classed by the number of sellers and the nature of the product: perfect competition (many sellers, identical product), monopolistic competition (many sellers, differentiated product), oligopoly (a few sellers), duopoly (two) and monopoly (one).

2. Perfect competition: features

1. Large number of buyers and sellers, each too small to affect price. The firm is a price-taker.
2. Homogeneous product: units of every seller are perfect substitutes.
3. Free entry and exit of firms.
4. Perfect knowledge of market conditions on both sides.
5. Perfect mobility of factors.
6. No transport costs, so one price rules throughout the market.
7. No government intervention or artificial restrictions.

The first three alone define pure competition (Chamberlin); perfect competition adds the rest. Because each firm can sell any amount at the ruling price, its demand (AR) curve is a horizontal line and AR = MR = price. Agricultural markets for grain come closest in practice.

3. Price determination under perfect competition

By the industry. Price is set by the intersection of market demand and market supply. Marshall compared demand and supply to the two blades of a pair of scissors: neither alone cuts. In the diagram the downward-sloping demand curve and the upward-sloping supply curve cross at the equilibrium price OP and quantity OQ. Above OP there is excess supply and price falls; below OP there is excess demand and price rises.

Time element (Marshall). In the market period supply is fixed (perishable goods), so demand alone decides price. In the short run supply can be changed only by varying the use of existing plant. In the long run plant size and the number of firms change, and cost of production determines price.

Equilibrium of the firm. The firm takes the price and chooses output where MR (= price) = MC and MC cuts MR from below.

Worked schedule (short run). Using the cost schedule from the note on cost concepts (TFC Rs. 100):

• Price Rs. 80: MC = 80 at 6 units. TR = 480, TC = 400, profit Rs. 80 (supernormal profit, since price exceeds ATC).
• Price Rs. 60: MC = 60 at 5 units. TR = 300, TC = 320, loss Rs. 20. The firm still produces, because price (60) exceeds AVC (44): it covers all variable costs and part of the fixed Rs. 100. Shutting down would mean losing the whole Rs. 100.
• Price below Rs. 40 (minimum AVC): the firm shuts down. The minimum point of AVC is the shut-down point.

Long run. Supernormal profits attract new firms; supply rises and price falls. Losses drive firms out; supply falls and price rises. Long-run equilibrium is reached where price = AR = MR = MC = minimum LAC. Each firm earns only normal profit and produces at the lowest point of its average cost curve, the optimum size. This is why perfect competition is regarded as efficient.

4. Monopoly: meaning and features

Monopoly (from the Greek monos, single, and polein, to sell) is a market with a single seller of a commodity that has no close substitute, and with barriers that prevent other firms from entering.

Features.

1. Single seller: the firm and the industry are the same.
2. No close substitutes: the cross-elasticity of demand with other goods is very low.
3. Barriers to entry: legal, technical or economic.
4. Price-maker: the monopolist can fix price or output, but not both, since demand decides how much will be bought at any price.
5. Downward-sloping demand curve: to sell more he must lower the price, so MR lies below AR.
6. Possibility of price discrimination between buyers.
7. Supernormal profits can persist in the long run because entry is blocked.

Sources (causes). Legal grants: patents, copyrights, licences, statutory monopolies such as Indian Railways; control of an essential raw material; very large economies of scale that make one firm the cheapest producer (a natural monopoly, such as water supply or electricity transmission); heavy initial capital; cartels and mergers.

Types.

• Pure (absolute) and imperfect (relative) monopoly: pure monopoly with no substitute at all is rare.
• Natural, legal and voluntary monopoly (a voluntary one formed by combination of firms).
• Private and public monopoly.
• Simple and discriminating monopoly: one price for all, or different prices for different buyers.

5. Price and output under monopoly

The monopolist produces where MR = MC (MC cutting MR from below) and charges the price that the AR (demand) curve shows for that output.

Worked example. Demand as in the revenue schedule (P = 10 at 1 unit, falling by Re. 1 per unit). MC = AC = Rs. 3 per unit.

MR exceeds MC (3) up to the 4th unit; the 5th unit adds MR of 2 but costs 3. The monopolist produces 4 units at Rs. 7, earning the maximum profit of Rs. 16. Under perfect competition, price would equal MC (Rs. 3) and output would be larger: monopoly means a higher price and a smaller output.

Diagram (described). AR slopes downward, MR below it and steeper; the U-shaped MC cuts MR from below at E; a vertical from E to the AR curve gives price; the rectangle between price and AC at that output is the supernormal profit. A monopolist always produces on the elastic part of the demand curve, since MR (= MC) must be positive. In the short run a monopolist can make a loss if demand is weak; in the long run he stays only if he covers costs.

6. Comparison

In India the Competition Act, 2002 does not prohibit monopoly as such; section 4 prohibits the abuse of a dominant position, such as unfair prices or limiting production, enforced by the Competition Commission of India.

How this is examined

“Explain the features of perfect competition. How price and output determined?” was a 10-mark essay in January 2026 (80-mark); “What is monopoly? Explain its features and types” was a 16-mark question in June 2025 (100-mark); “Monopoly” or “Features of monopoly” was a short note in both January 2026 papers; and “Perfect competition” a 6-mark note in June 2025. State the MR = MC rule and describe the diagram even when the question asks only for features.