A perfectly competitive firm has a unique relationship between price and quantity supplied. It equates marginal revenue and hence price (Price = AR = MR under perfect competition) with marginal cost (MC) at equilibrium.
Therefore, marginal cost curve portrays the various quantities of the product that will be produced and offered for sale in the market at various corresponding prices. In other words, marginal cost curve under perfect competition associates price with quantities supplied. Thus, the marginal cost curve under perfect competition functions as the supply curve of the firm, which by aggregation gives rise to the supply curve of the industry.
What is true under perfect competition is not applicable under a monopoly since the monopolist does not equate marginal cost with price under equilibrium. In this situation, like other profit maximising firms, the monopolist makes marginal cost equal to marginal revenue.
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But, this marginal revenue stands lower than price. That is why; the marginal cost for the monopolist will be less than the price. Thus, the marginal cost curve of the monopolist does not associate price and quantity supplied. It only relates marginal cost and quantity produced as well as supplied.
The relationship between price (P) and marginal cost (MC) under monopoly depends upon the demand conditions, i.e., the magnitude of the price elasticity of demand (e). In equilibrium, MR = MC, P==MR [e/(e-l)]= MC[e/(e-l)] expresses the monopoly price as a function of the marginal cost and the price elasticity of demand for the product of the monopolist.
The same marginal cost for him may correspond to different price levels depending upon the value of the elasticity of demand (in absolute terms). Similarly, the same level of price in a monopolistic market could be associated with various levels of marginal cost depending upon the magnitude of price elasticity of demand.
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Since there is no one to one correspondence between the price and the marginal cost, the marginal cost curve under monopoly cannot function as the supply curve. In other words, it is not possible to derive a unique supply curve of the monopolist from its marginal cost curve.
In Fig. 14.7, the two demand curves AR1, and AR2 result in the same output OQ, since the given MC curve cuts the common point of intersection ‘E’ of the corresponding marginal revenue curves MR1, and MR2 However, corresponding to this equilibrium level of output and equilibrium point ‘E’, the equilibrium prices are different.
The output OQ will be sold at price OP1, when demand curve is AR1, while the same output will be sold at price OP2, if the demand curve is AR2 Thus, given the marginal cost curve MC, the same output (OQ) is supplied at two different prices OP1, and OP2, with different demand curves.
Fig. 14.8, two different levels of output are associated with the same price. When demand curve is AR1, the corresponding marginal revenue curve is MR1, which is intersected by the given MC curve at point E1. This implies that at the equilibrium price OP, the quantity supplied is OQ1.
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Further, with demand curve AR2, the corresponding marginal revenue curve MR2 is intersected by the given MC curve at point E2 consequently, the equilibrium price is OP and the corresponding equilibrium quantity (supplied) is OQ2 In this manner, two different quantities OQ1 and OQ2 are supplied at the same price OP with different demand conditions.
It is clear from the above discussion that there is no unique relationship between the price and quantity supplied under monopoly. In order to find out the amount produced at a particular price, we need to know the demand curve of the firm as well as its marginal cost curve.
Hence, the supply curve of the firm under monopoly does not exist. In the words of Baumol, “The supply curve is, strictly speaking a concept which is usually relevant only for the case of pure (or perfect) competition.
The reason for this lies in its definition-the supply curve is designed to answer question of the firm, ‘How much will firm ‘A’ supply if it encounters a price which is fixed at P dollars’. But such a question is most relevant to the behaviour of firms that actually deal with prices over whose determination they exercise no influence”.
The absence of supply curve under monopoly implies that a monopolist cannot independently set both the price of his product and the quantity to be sold. Once he selects his price level, his output level is uniquely determined by what the consumers will take at that price.
Likewise, if he chooses the output level, his price is determined by the demand curve. The monopolist cannot merely adjust quantity at a given price, as each quantity change by him will bring about a change in the price at which the product can be sold. He may lower the price and increase the quality sold or he may limit his output to raise the price. That is why; the monopolist is always in search of optimum price-output combination at which he yields the maximum possible profit.