Competitive firms are known as a ‘price-taker’ as their prices are dictated by the other firms in the market, whereas a monopolistic firm is a ‘price-setter’ as they set the price as high as the consumer is willing to pay. This can lead to supernormal profits. Supernormal profits are normally eliminated within the competitive market by the entry of new firms which causes a fall in price. With no fear of a competitor entering the market you remove the ability to prevent long term supernormal profits. Figure 1. Shows the increased profits a monopolistic firm can make from production where the average cost meets the marginal revenue, but the price is set by the demand …show more content…
Monopolies are seen to be profit maximising, they wish to manufacture as little as possible with the biggest profit margins while still meeting demand. In comparison the competitive market manufactures at the point which is most efficient, usually where the marginal cost of production meets the average cost ( by default, where average cost is at its lowest) because this is where the product is cheapest to produce, i.e. the optimal output. Hicks wrote ‘the best of all monopoly profit is a quiet life’ this refers to the idea that monopolies don’t need to be productively efficient and produce at this optimal point, as illustrated by figure 2. This creates a deadweight loss - a loss in the social surplus as the monopoly is creating less than the consumer is demanding- and there is a restriction of output in comparison to perfect competition. The failure to maximise social surplus is the social cost of a monopolistic