Economics explained
Category:
Market structures
Comparing monopoly with perfect competition
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Deadweight loss can be seen to occur in a monopolistic market when comparing that market with a competitive market. This is due to the market power of the monopolist.
Marginal revenue curves
Monopolies produce less than competitive firms because they have different marginal revenue curves (MR).
Monopolies face downward-sloping marginal revenue curves.
Competitive firms face horizontal marginal revenue curves
The marginal revenue curve for a competitive firm, MRP, is a horizontal line set at the market price, PCP , because a competitive firm is such a small part of its industry that it can’t affect the market price. As a result, it can sell as many or as few units as it wants at PCP , meaning that the marginal revenue it gets for every unit it chooses to produce is PCP . MRP = PCP for a competitive firm.
Market forces adjust supply and demand until the market price is equal to the minimum average total cost at which a firm can produce. Geometrically, this fact means that the horizontal MRP = PCP line just touches the bottom of the U-shaped ATC curve.