Chapter 23, Problem 1QP

To determine

The difference between perfectly competitive market and monopoly.

Explanation of Solution

Both the productive and allocative efficiencies can only be seen in the perfectly competitive market, where the industry’s demand curve is horizontal. In a horizontal demand curve, price is equal to marginal cost is equal to marginal revenue is equal to average cost is equal to average revenue $\left(\text{P}=\text{MC}=\text{MR}=\text{AC}=\text{AR}\right)$ . Therefore, the resource allocative efficiency $\text{P}=\text{MC}$ exists in a perfectly competitive market, whereas in a single price monopoly that faces a downward sloping demand curve, the price will be greater than the marginal revenue. The monopoly firm produces at the point where $\text{MC}=\text{MR}$  while there is no resource allocative efficiency because monopoly sets a price that is greater than the marginal cost.

Economics Concept Introduction

Perfectly competitive market: A perfectly competitive market is a market structure where there are many buyers and sellers, and there are identical products in the market.

Monopoly: Monopoly refers to a market structure with the features of a single seller and more buyers. The firms have full control over the market.