A2 Economics – Imperfect competition and marginal analysis

For the CAIE A2 Economics course and NCEA AS 3.2, below is a note on Imperfect Competition which tends to be a popular question in the exam. The rule for maximising profit or minimising a loss (the equilibrium) for a monopoly is the same as any other firm. The most profitable output or smallest loss is where marginal revenue (MR) = marginal cost (MC). Any other position will result in a smaller profit or greater loss

Therefore, the equilibrium output (determined from the intersection of the MC and MR curves is at a price of PM ($8) and quantity Qm ($200m). The average revenue (AR) = $8 and the average cost (AC) = $5.

• Total revenue (TR) = $8 x 200m = $1,600m

• Total cost (TC) = $5 x 200m = $1,000m

• Profit = TR – TC = $1,600-$1,000 = $600m – yellow shaded area.

A monopoly charges more and produces less than it would be the case if the firm operated as a perfect competition. Operating at the equilibrium output position creates a deadweight loss = ABE green shaded area. At the equilibrium position the market is not allocatively efficient because consumer surplus and producer surplus are not maximised. The new consumer surplus is the area above the profit maximising price – light blue shaded area.

For more on Imperfect Competition view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.