Perfect Competition and Monopoly (A Level Economics)

Perfect competition and monopoly (A Level) are the two ends of the market-structure line, and the exam uses them as a pair. One has thousands of identical firms with no power over price. The other has one firm with all of it. Learn the three diagrams, the assumptions behind each, and the efficiency comparison, and every other market structure is a variation. This page gives you the short-run and long-run perfect competition diagrams, the monopoly diagram with the deadweight loss, the assumptions and efficiency tables, the evaluation both ways, a worked example in pounds and three exam-style questions with the answers derived.

Spec map: where perfect competition and monopoly sit on your board

Sources for the table, all read in September 2026: AQA’s specification (4.1.x in the PDF, 3.1.x online), Edexcel Issue 2, OCR v3.0 (June 2026) and the Cambridge syllabus for 2026 to 2028. The cost and revenue curves themselves are on the costs, revenue and profit page. Oligopoly has its own page. Price discrimination, monopsony and contestable markets are covered separately.

What you must be able to do

• List the assumptions of perfect competition and of monopoly, and say what each one does to the diagram.
• Draw a perfectly competitive firm earning supernormal profit in the short run, with AR = MR horizontal.
• Explain how entry drives price down to the minimum of ATC and show the long-run normal-profit diagram.
• Draw the monopoly diagram: MC = MR for output, price read up to AR, the profit rectangle and the deadweight-loss triangle.
• Compare the two on allocative, productive and dynamic efficiency, and evaluate monopoly both ways.
• Calculate output, price, profit and the deadweight loss from simple equations.

The assumptions: what makes each market what it is

The perfect competition diagram in the short run: supernormal profit

The market sets the price. The firm is so small that it can sell as much as it likes at that price, so its demand curve is horizontal: AR = MR = P. It produces where MC = MR, the same rule as every firm. If price is above ATC at that output, the firm earns supernormal profit, the rectangle between price and ATC.

Read the numbers off it. Total revenue is 5 × £35 = £175. Total cost is 5 × £23 = £115. Profit is £60, the shaded rectangle. The fifth unit costs £35 to make and sells for £35, so it is the last one worth making. A sixth would cost £56.

The long run: entry, exit and normal profit

Supernormal profit is a signal, and with free entry other firms answer it. New firms come in, market supply shifts right, and the market price falls. Each firm’s horizontal AR = MR line drops with it. Entry stops when there is nothing left to attract it: when price has fallen to the minimum of ATC and every firm earns normal profit only.

At that point one dot does four jobs: MC = MR (profit maximising), AR = ATC (normal profit), P = MC (allocative efficiency) and output at minimum ATC (productive efficiency). That is why this diagram is the benchmark every other market structure is measured against. Each firm now makes less, about 4.2 units against 5, while the market makes more, because there are more firms.

The monopoly diagram: MC = MR, price on AR, profit and deadweight loss

A monopolist faces the whole market demand curve, so AR slopes down and MR sits below it, twice as steep. Output is where MC = MR, the same rule as before. But the price is not at that crossing. Go straight up from the output to the AR curve. That is the price buyers will pay for that quantity, and it is above marginal cost.

Two areas matter. The profit rectangle, between price and average cost out to the output, is £400. The deadweight-loss triangle, between AR and MC from the monopoly output to where P = MC, is £200: welfare a competitive market would have created and the monopoly does not, because it restricts output to keep the price up. With barriers to entry, both last into the long run.

Efficiency: allocative, productive and dynamic

Evaluating monopoly: the case against and the case for

Worked example — the only ferry to an island

One company runs the only ferry to a small island. Prices are in pounds per return ticket, quantities in tickets a sailing.

1. Demand, which is AR: P = 60 − Q. Marginal revenue has twice the slope: MR = 60 − 2Q.
2. Costs are constant: MC = AC = £20 a passenger.
3. Profit-maximising output: MR = MC, so 60 − 2Q = 20 and Q = 20 tickets.
4. Price from the demand curve, not from MR: P = 60 − 20 = £40.
5. Profit = (£40 − £20) × 20 = £400 a sailing. Total revenue £800, total cost £400.
6. The competitive benchmark: price equal to marginal cost, so 60 − Q = 20 and Q = 40 at £20. Twice the passengers at half the price.
7. Deadweight loss = ½ × (£40 − £20) × (40 − 20) = £200 a sailing. Twenty people who valued the crossing above its £20 cost stayed on the mainland.
8. Interpretation: price is £20 above marginal cost, so the ferry is allocatively inefficient. Whether the £400 is a problem depends on what it funds. A new boat is dynamic efficiency. A dividend is a transfer.

Exam-style questions

Q1: Summer demand for the ferry rises to P = 80 − Q. Costs are unchanged at £20. Calculate the new output, price and profit. (4 marks)
A: New MR = 80 − 2Q. Set equal to MC: 80 − 2Q = 20, so Q = 30 (1). Price from the new demand curve: 80 − 30 = £50 (1). Profit = (£50 − £20) × 30 = £900 (1). Output, price and profit all rise, because a monopolist responds to a demand shift by selling more at a higher price, not by holding price fixed (1).

Q2: Back in the original market (P = 60 − Q, MC = AC = £20), a regulator caps the ticket price at £30. Calculate the new output, profit and deadweight loss. Then explain what a cap at £20 would do. (6 marks)
A: At £30 the ferry sells what demand allows: 60 − 30 = 30 tickets (1). Profit = (£30 − £20) × 30 = £300 (1). Deadweight loss = ½ × (£30 − £20) × (40 − 30) = £50, down from £200 (1). The cap raises output, cuts profit and shrinks the welfare loss (1). A cap at £20, equal to marginal cost, gives the competitive output of 40 tickets, normal profit only and no deadweight loss (1). The risk is that with no supernormal profit the company has no fund for a new boat, so regulators usually cap above marginal cost (1).

Q3: Evaluate the view that monopoly is always against the interests of consumers. (25 marks)
A: Two developed arguments on each side, and a judgement that picks one.

• Against monopoly: the diagram, output at MC = MR and price on AR above marginal cost. Higher price, lower output, a deadweight loss (£200 in the example) and consumer surplus turned into profit. Without a rival, X-inefficiency raises costs and prices.
• For monopoly: economies of scale can give lower costs than many small firms, so price may be no higher than under competition (the £40 case). Supernormal profit funds research and barriers let the firm keep the reward, so consumers can gain over time. Natural monopolies are cheaper as one network.
• Evaluation: it depends on the barriers, because the threat of entry keeps prices down. On regulation, since a price cap keeps the scale economies and removes most of the deadweight loss (Q2). On the time period, static loss now against dynamic gains later. And on what the profit is spent on.
• Judgement: “always” is too strong. In the static model monopoly harms consumers. With large scale economies, real innovation and a regulated price, they can gain.

Examiner’s checklist: the mistakes that lose market structure marks

• The monopoly price at MC = MR. That crossing gives the output. The price is on AR above it.
• MR drawn on AR, or not twice as steep. For a straight-line demand curve, MR is below AR with double the slope.
• The profit rectangle measured to MC. Profit is between price and average cost. The deadweight loss is the triangle out to where P = MC.
• Perfect competition with a sloping demand curve. The firm’s AR = MR is horizontal. The sloping curve belongs to the market diagram.
• No long-run story. Supernormal profit, entry, supply up, price down, normal profit. Five steps, in order.
• One-sided evaluation. Every monopoly question wants economies of scale or dynamic efficiency on the other side, then a judgement about which wins here.

Key takeaways

• Perfect competition: many firms, identical goods, free entry, price taker, AR = MR horizontal.
• Short run: supernormal profit where price is above ATC. Long run: entry pushes price to minimum ATC and normal profit.
• Monopoly: one firm, barriers, price maker, AR sloping down and MR twice as steep. Output at MC = MR, price on AR.
• Monopoly profit lasts. So does the deadweight loss, the triangle between AR and MC from the monopoly output to the competitive one.
• Perfect competition is allocatively and productively efficient in the long run. Monopoly is neither, but may be dynamically efficient. That is the evaluation.

FAQ

Q: How do I draw the monopoly diagram at A Level?
A: AR sloping down, MR below it and twice as steep, then MC and AC. Mark the output where MC = MR and draw a dashed line up to AR for the price. Shade the profit rectangle between price and AC, and the deadweight-loss triangle between AR and MC out to where they meet. Figure 3 is the finished version.

Q: Why does a firm in perfect competition only make normal profit in the long run?
A: Because entry is free. Supernormal profit attracts new firms, supply rises and the price falls. Entry stops only when there is no supernormal profit left, which is when price equals the minimum of average cost. Losses work in reverse, through exit.

Q: What is the deadweight loss of monopoly?
A: The welfare lost because the monopolist sells less than a competitive market would. On the diagram it is the triangle between demand and MC, from the monopoly output out to where price equals marginal cost. In the worked example it is £200 a sailing.

Q: Is monopoly ever better than perfect competition?
A: It can be, on three grounds: economies of scale, supernormal profit that funds innovation, and natural monopoly where one network is cheaper than two. The exam wants all three, each with a limit, then a judgement.

Q: What market structures are on the A Level Economics specification?
A: Perfect competition, monopolistic competition, oligopoly and monopoly on every board, plus monopsony and contestable markets. The A Level economics diagrams page has every market structure diagram, and the revision hub lists the pages for the others.

Q: Which questions come up on perfect competition and monopoly?
A: “Explain, using a diagram, why a firm in perfect competition earns only normal profit in the long run” for 4 to 8 marks, a calculation of the profit-maximising output, and the 15 or 25-mark evaluation of monopoly in Q3. Board detail is on the AQA, Edexcel and OCR pages.

Turn the three diagrams into marks

If the monopoly price still comes off MR in a timed paper, or the long-run story stalls after “firms enter”, one lesson fixes that. Drop me a line with your board and exam date, and I will come back within 24 hours with a slot. The rate and the lesson format are on the A Level economics tutor page.