Monopoly and Perfect competition in short and long
run
A monopoly is a market structure in which there is only one seller of a good or
service. Monopolies typically have significant market power, which allows them to set
high prices and restrict output.
Key Points:

Single seller: There is only one seller in the market.

Significant market power: Monopolies have the power to set high prices and
restrict output.

Barriers to entry: There are barriers to entry that prevent new firms from
entering the market.

Inefficiency: Monopolies are typically inefficient, as they produce less output
than would be produced in a competitive market.
Short-run vs. Long-run Monopoly

Short-run monopoly: In the short run, a monopolist can earn a positive
economic profit by restricting output and setting a price above the marginal
cost of production.

Long-run monopoly: In the long run, new firms may enter the market, which
will erode the monopolist's market power and force it to charge a price that is
closer to its marginal cost of production.
Examples:

Utilities: Many utilities, such as electricity and water providers, operate as
monopolies.

Pharmaceutical companies: Pharmaceutical companies that hold patents on
certain drugs have a monopoly on the production of those drugs.
Perfect Competition
Concept: Perfect competition is a market structure in which there are many sellers of
a homogeneous good or service, and there are no barriers to entry or exit. In a
perfectly competitive market, firms have no market power and are price takers,
meaning they must take the market price as given.
Key Points:

Many sellers: There are many sellers in the market.
Monopoly and Perfect competition in short and long
run

Homogeneous good or service: The goods or services produced by all firms
are identical.

No barriers to entry or exit: There are no barriers to prevent new firms from
entering the market or existing firms from leaving the market.

Price takers: Firms have no market power and must take the market price as
given.
Short-run vs. Long-run Perfect Competition

Short-run perfect competition: In the short run, firms in a perfectly competitive
market may earn positive or negative economic profits.

Long-run perfect competition: In the long run, firms in a perfectly competitive
market will earn zero economic profit. This is because entry and exit will drive
the price down to the point where firms are just covering their costs.
Examples:

Agricultural markets: Agricultural markets, such as the market for wheat or
corn, are often cited as examples of perfectly competitive markets.

Financial markets: Financial markets, such as the stock market or the bond
market, are also often considered to be perfectly competitive.
Matrix Calculation Example
Consider a monopoly that produces widgets. The monopolist's marginal cost of
production is $10 per widget, and the market demand for widgets is given by the
following equation:
Q = 100 - 2P
where Q is the quantity of widgets demanded and P is the price of widgets.
To maximize its profit, the monopolist will set a price at which marginal revenue
equals marginal cost. Marginal revenue is the additional revenue that the monopolist
can earn by selling one more widget. The formula for marginal revenue is:
MR = dR / dQ
where R is the monopolist's total revenue.
In this case, the monopolist's total revenue is given by:
Monopoly and Perfect competition in short and long
run
R = PQ
Substituting this into the formula for marginal revenue, we get:
MR = P + Q * dP / dQ
Since the monopolist is setting a price above the marginal cost of production, the
demand curve is downward-sloping, so dP / dQ is negative. Therefore, we can
rewrite the formula for marginal revenue as:
MR = P - Q
Setting marginal revenue equal to marginal cost, we get:
P - Q = 10
Substituting the market demand equation into this equation, we get:
P - (100 - 2P) = 10
Solving for P, we get:
P = 30
Substituting this price back into the market demand equation, we get:
Q = 40
Therefore, the monopolist will produce 40 widgets