1 Answer | Add Yours
If a market begins as a perfectly competitive market and then becomes a monopoly, the quantity that is made of the product will drop and the price for it will increase. The reason for this is that the marginal revenue curve in a monopoly is downward sloping and is to the left of the demand curve. This is as opposed to a perfectly competitive market in which the marginal revenue curve is horizontal and is the same as the demand curve. As long as the demand and the cost curves in the market stay the same, the quantity produced will drop and the equilibrium price will rise.
In both cases, the firm will produce at the quantity where marginal revenue equals marginal cost. But in the monopoly, that point will be at a lower quantity because the MR curve slopes downward. The price will be higher because it will be at the point where that MR=MC quantity intersects the demand curve. This point is higher than the horizontal MR curve would have been in perfect competition.
Follow this link for a graphic illustration of this change.
We’ve answered 318,910 questions. We can answer yours, too.Ask a question