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Perfect competition is a market structure which is characterised by many buyer and many sellers.

As such, no single buyer or seller can affect the market price by increasing or decreasing supply. Every producer is thus a price taker. In perfect competition, all firms sell an homogenous product. There is also perfect mobility of resources, free entry and exit of firm and perfect knowledge. As the individual firm can only contribute a small fraction to the total output of the industry, its action cannot affect price. Therefore, the demand curve of an individual firm is perfect elastic. It is a horizontal straight line at the prevailing market price over the range of the output that the firm can produce. Assuming that factor price remain constant and firms in competitive industry simultaneously expand or contract output, the industry’s supply curve is the horizontal summation of the supply curves of all the producers. Since the firms supply curve is its MC curve, the industry supply curve is the aggregate marginal cost curve, as shown below:

Equilibrium in the market is reached at the point where the demand curve intersect with the supply curve. Thus, as shown I the diagram above, equilibrium price is 0P1, and output is 0Q1. In the short run, firms in the perfect competition industry may enjoy normal or supernormal profits. However, those firms which previously enjoyed supernormal profits will be able to reap only normal profit in the long runs due to the entrance of news firms which were attracted to the industry. To survive the competition posed by new firms, the perfectly competitive firm can survive in the long run only if it is producing at optimum size or lowest point of the average cost curve. At the equilibrium point, the firm is producing the least cost output at the most efficient plant size. Thus, the firm is technologically efficient. Since the price equates marginal cost in perfect competition, this market structure is allocatively efficient.

marginal cost drops from MC1 to MC2. Thus. it is possible to have a lower price and larger output under monopoly than under perfect competition. if economics of scale do exist. However. government legislation. monopoly would take advantage of any economics of scale (buying in bulk to reduce the production cost). These come in the form of patent. supplying at the output in the market. As result of economics of scale. The monopolist will maximise profit by producing up to the point where marginal cost equal to marginal revenue The firms produce 0Q and sells at the price 0P and makes supernormal profit at PEFD. Price also fall to 0P2 compared with the price under perfect competition of 0P1. Thus. it would appear that monopoly lead to a higher price and lower output than a competitive market. Discrimination is also practised by the monopolist to cream off some of the consumer surplus. This lead to a rise in output to 0Q2 as compared to 0Q1 under perfect competition. huge capital outlay. the monopoly can make supernormal profit in the long run. Since the firm supplies all the market output. Thus. In a monopolistic situation. The monopolist is faced with a downward sloping average revenue (AR) curve and hence its marginal revenue (MR) curve will also slope downwards and lie below the AR curve. in reality. there are barriers to entry to keep out new competitors. it can influence either price or the level output but not both at the same time.A monopoly is a market structure in which a single firm or a combination of firms collectively as one firm. .