Monopoly market is market which has many buyers but one seller. Therefore, the seller can either decide the price to sell or quantity to sell in the market. The seller does not face any competition in short run and long run because there are barriers of entry and exit which prevent new firms from entering the market. This enables monopoly to earn supernormal profit in both short run and long run.
The market demand curve is the same as that of the monopoly because the firm forms the market. Therefore, the average revenue curve which is negatively sloping is the demand curve of the firm and the market. The elasticity of the demand curve is the only obstacle which the firm faces in setting the price. Now, assuming the firm has aim of maximizing profit it will have a short run equilibrium where marginal revenue equals marginal cost (MR= MC) as in diagram below.
The monopoly will sell quantity Q1 and at price P1 which is above average total cost curve (ATC), hence making the shown supernormal profit (economic profit). The monopoly will be able to maintain this supernormal profit in long run because no other firm will enter the market to increase supply (competition).
On the other hand, perfect competitive firm will earn supernormal profit only in short run. This is because when the firm makes super normal profit other firms will enter the market. This increases competition until all the economic profit is eliminated (Kamien, & Schwartz, 1982).
Short run super normal profit of perfect competitive firm
The market price is equal to marginal revenue (p=MR) and is also equal to AR. Just like in case of monopoly, the perfect competitive firm maximizes profit at a point where marginal cost equals marginal revenue. Therefore, it makes super normal profit ABCDE as it sales quantity Q1 as shown in the following diagram.
This profit attracts more firms to entry the market because there are no barriers of entry and exit unlike in a monopoly market. When more firms enter the market, supply will increase and force the market price to fall until all the economic profit is eliminated as shown below.
References
Kamien, M. I., & Schwartz, N. L. 1982. Market structure and innovation. Cambridge: Cambridge University Press
