# This is a good and fun question that I am still scratching my head oever.

We know monopoly's profit maximisation is MC=MR. We also know that perfect competition's profit maximising criteria is such that P=MC.

Just what exactly does this mean?
I know for one that, the firm tries to maxmise profit as a whole and not just per unit profit.

In the search window above, search on monopoly. You will see the responses.

1 year ago

8 months ago

## To understand the profit maximization criteria in monopoly and perfect competition, let's break down what MC, MR, and P represent in each scenario.

In monopoly, a single firm has control over the entire market, meaning it faces a downward-sloping demand curve. The profit maximization condition for a monopoly is MC = MR. Here's what each term signifies:

1. MC (Marginal Cost): MC represents the additional cost incurred by producing one more unit of output. It is the change in total cost divided by the change in quantity. In other words, it measures the cost of producing an additional unit.

2. MR (Marginal Revenue): MR represents the additional revenue gained by selling one more unit of output. It is the change in total revenue divided by the change in quantity. In a monopoly, since the firm is the sole producer, the marginal revenue earned from selling an additional unit is equal to the price of that unit.

By equating MC and MR, a monopoly firm maximizes its profit by producing where the extra cost of producing one more unit is exactly offset by the extra revenue gained from selling that unit.

On the other hand, in perfect competition, there are many small firms competing against each other in a market. Each firm in perfect competition is a price taker, meaning it cannot influence the market price. The profit maximization condition for a competitive firm is P = MC. Here's what each term represents:

1. P (Price): In perfect competition, the price is determined by the market forces of supply and demand. Each individual firm has no control over the price and must accept the market price as given.

2. MC (Marginal Cost): Similar to monopoly, MC in perfect competition represents the additional cost incurred by producing one more unit of output. It measures the cost of producing an additional unit.

By setting price equal to marginal cost (P = MC), a competitive firm maximizes its profit by producing at a level where selling an additional unit adds exactly as much to revenue as it does to cost.

To summarize, in monopoly, the profit maximization criteria is MC = MR, and in perfect competition, it is P = MC. The difference lies in the ability of the firms to control the price. Monopolies can set their price above marginal cost, while competitive firms must accept the market price as given.