Imperfect Competition & Monopoly.
Imperfect Competition & Monopoly.Imperfect competition.
Prevails in a market whenever individual sellers have some degree of control over the price of there output.
is the market structure in which only one producer or seller exists for a product that has no close substitutes.
Characteristics of monopolies:
These barriers to entry are:
Demand and marginal revenue.
Under pure monopoly, the business is the industry and faces the negatively sloped industry demand curve for the product. This means if the monopolist want to sell more of it's product it must lower it's price. Thus, for a monopolist MR is less than price, and the Marginal Revenue (MR) curve lies below the demand curve.
Monopoly: Short term equilibrium.
Profit maximizing rule: Produce at an output level at which MC = MR.
Finding the monopolist price and output. Steps to follow:
Consider the following diagram, which shows the demand and unit loss situation of a monopolist.
What is the output where the firms profits are maximized? - 60.
The price at that output level is - $11.
The average total cost at that output level is - $8.
The profit / loss per unit is : P - ATC = 11-8 = $3
The total revenue at this output is : TR = P ´ Q = $11 ´ 60 = $660
The total cost at that output level is : TC = TVC + TFC = ATC ´ Q = $8 ´ 60 = $480
The total profit / loss at this output level is : TP = TR - TC = $660 - $480 = $180.
The social costs of monopoly power.
For a monopolist to maximize profit, the firm should produce at the point, where MR = MC. So that the price and the quality are Pm & Qm respectively. In a competitive market price must be equal to the marginal cost so that competitive price and quantity are Pc & Qc. How will surplus change if we move from the competitive price and quantity to the monopolist price and quantity (from Pc & Qc to Pm &Qm)? Under monopoly the P is higher and the consumer buy less, because of the high price, those consumers who buy a good, loose a surplus of an amount given by the rectangle A. Those consumers who do not buy a good at a price Pm but buy at a price Pc also loose surplus given by the triangle B. The total loss of consumers surplus is therefore : A + B. The producer gains rectangle A by selling at a higher price Pm but looses triangle C, the additional profit it would had earned by selling at Qc & Pc. The total gain in producer surplus is therefore the deadweight loss or social costs from monopoly power are represented by triangles B and C.
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Introduction to microeconomics.
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