The In Efficiency Of Monopoly
The monopolist produces a lower output and sells it at a higher price than would a competitive industry”
a) Briefly explain the equilibrium position of the monopolist. Use your analysis to show what is meant by this statement
Monopolies are described as Price Makers, and are therefore the theoretical extreme opposite of a perfectly competitive firm.
Like perfectly competitive firms the Monopolist will seek to maximize profit and produce where MC=MR. The monopolist however faces much less competition if any and therefore can afford to restrict output and charge a higher price. In this way The monopolist can earn abnormal profit in both the short and long run.
In the long run perfectly competitive firms are both allocatively and productively efficient.The monopolist is Allocatively inefficient since they do not produce all units up to the point where the social benefit gained from the unit is equal to its social cost. They restrict their output in order to keep prices high. They produce where MC=MR regardless of the cost to society in terms of dead weight loss or community surplus.
They are also productively inefficient since they Do not operate on the lowest point of the average cost curve. They operate at the profit maximizing output of MC=MR. Unlike a perfectly competitive firm the Monopolist faces a downward sloping demand or AR curve and a MR curve that is twice as steep. Regardless of monopoly power they must lower their prices to sell more. If they operate at the minimum point on the AC curve profits may fall as prices will have to be reduced to sell this extra output.
a) Briefly explain the equilibrium position of the monopolist. Use your analysis to show what is meant by this statement
Monopolies are described as Price Makers, and are therefore the theoretical extreme opposite of a perfectly competitive firm.
Like perfectly competitive firms the Monopolist will seek to maximize profit and produce where MC=MR. The monopolist however faces much less competition if any and therefore can afford to restrict output and charge a higher price. In this way The monopolist can earn abnormal profit in both the short and long run.
In the long run perfectly competitive firms are both allocatively and productively efficient.The monopolist is Allocatively inefficient since they do not produce all units up to the point where the social benefit gained from the unit is equal to its social cost. They restrict their output in order to keep prices high. They produce where MC=MR regardless of the cost to society in terms of dead weight loss or community surplus.
They are also productively inefficient since they Do not operate on the lowest point of the average cost curve. They operate at the profit maximizing output of MC=MR. Unlike a perfectly competitive firm the Monopolist faces a downward sloping demand or AR curve and a MR curve that is twice as steep. Regardless of monopoly power they must lower their prices to sell more. If they operate at the minimum point on the AC curve profits may fall as prices will have to be reduced to sell this extra output.