Application of monopoly
In the case of a competitive equilibrium, each firm will be producing where p = MC. This implies economic efficiency, for marginal cost is ultimately measured in terms of opportunity cost, which is referred to as the Marginal Rate of Transformation (MRT).
Since, consumers choose between goods until the marginal rate of substitution (MRS), or the rate at which they are willing to substitute one for the other, equals the price ratio. This implies a measure of economic efficiency at MRS = MRT.
Now consider a monopolist. If price is above marginal cost, a social loss incurred. Since, there is an efficiency loss from monopoly pricing where p ¹ MC. For this reason, economists have stressed the virtues of competitive industry.
Since, consumers choose between goods until the marginal rate of substitution (MRS), or the rate at which they are willing to substitute one for the other, equals the price ratio. This implies a measure of economic efficiency at MRS = MRT.
Now consider a monopolist. If price is above marginal cost, a social loss incurred. Since, there is an efficiency loss from monopoly pricing where p ¹ MC. For this reason, economists have stressed the virtues of competitive industry.