Why does a single-price monopoly produce a smaller output and charge more than the price that would prevail if the market were perfectly competitive?

What will be an ideal response?


The market supply curve for a competitive market is the horizontal sum of the individual firm's marginal cost curves. Equilibrium output in this competitive market is determined where the market supply curve intersects the market demand curve, and at this point price equals marginal cost, that is P = MC. Equilibrium output for a single-price monopoly is determined at the intersection of its marginal cost curve and its marginal revenue curve. Marginal revenue is less than price, which means that MR = MC at less output than that for which P=MC, so the monopoly produces less than a perfectly completive market. For a monopoly price exceeds marginal revenue which, in turn, equals marginal cost. Therefore for a monopoly, P > MC which means the monopoly price exceeds the price in a perfectly competitive market.

Economics

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Economics

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Economics

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Economics