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Perfect Competition versus Pure Monopoly 327

industry-wide marginal revenue equals marginal cost. Figure 8.3 shows MR

(derived from the industry demand curve in the usual way). The line S does

double duty: Besides being a supply curve, it measures the monopolist’s mar-

ginal cost curve. (The monopolist can produce additional units at this unit

cost.) The monopolist’s optimal output is QM(where MR MC), and the

required market-clearing price is PM.

Figure 8.3 provides a graphical comparison of perfect competition and

pure monopoly. Under competition, long-run price is driven down to the low-

est sustainable level (where industry economic profit is zero). As a conse-

quence, a competitive market delivers maximum benefits to consumers. In

contrast, the monopolist has the opportunity to exercise market power, that is,

to raise price above competitive levels. The monopolist does not set price and

output capriciously. The key to maximizing monopoly profit is to restrict out-

put to well below the competitive level and, in so doing, to raise price. The

monopolist’s optimal level of output occurs where marginal revenue equals

FIGURE 8.3

Perfect Competition

versus Pure Monopoly

Under perfect

competition, market

equilibrium occurs at

point E, where supply

equals demand. If the

same industry were

controlled by a

monopolist, the

outcome would be M.

By restricting output

and raising price, the

monopolist maximizes

its profit.

Q

Output

Dollars per Unit of Output

Monopoly

outcome

PC

Marginal

revenue (MR) Competitive

outcome

Dead-

weight

loss

Industry

demand (D)

PM

QM QC

P

E

M

A

C D S

B

MC = AC

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