A monopoly can earn positive profits because it
- 9.2 How a Profit-Maximizing Monopoly Chooses Output and Price
- How a Profit-Maximizing Monopoly Chooses Output and Price
- Market Power and Monopoly
- Monopolistic Competition in the Long-run
9.2 How a Profit-Maximizing Monopoly Chooses Output and Price
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In a Monopoly Market Structure, there is only one firm prevailing in a particular industry. One firm producing a good without close substitutes. The product is often unique. Ex: When Apple started producing the iPad, it arguably had a monopoly over the tablet market. There are significant barriers to entry set up by the monopolist.
The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm's market demand curve to shift to the left. As entry into the market increases, the firm's demand curve will continue shifting to the left until it is just tangent to the average total cost curve at the profit maximizing level of output, as shown in Figure. At this point, the firm's economic profits are zero, and there is no longer any incentive for new firms to enter the market. Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale, labeled as point b in Figure. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.
Consider a monopoly firm, comfortably surrounded by barriers to entry so that it need not fear competition from other producers. How will this monopoly choose its profit-maximizing quantity of output, and what price will it charge? Profits for the monopolist, like any firm, will be equal to total revenues minus total costs. We can analyze the pattern of costs for the monopoly within the same framework as the costs of a perfectly competitive firm that is, by using total cost, fixed cost, variable cost, marginal cost, average cost, and average variable cost. However, because a monopoly faces no competition, its situation and its decision process will differ from that of a perfectly competitive firm. A perfectly competitive firm acts as a price taker, so we calculate total revenue taking the given market price and multiplying it by the quantity of output that the firm chooses. The demand curve as it is perceived by a perfectly competitive firm appears in Figure a.
In the short run, a firm operating in a competitive industry will shut down if price is When the profit-maximizing firms in competitive markets are earning profits.
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In order to determine the profit maximizing level of output, the monopolist will need to supplement its information about market demand and prices with data on its costs of production for different levels of output. As an example of the costs that a monopolist might face, consider the data in Table. The first two columns of Table represent the market demand schedule that the monopolist faces. As the price falls, the market's demand for output increases. The third column reports the total revenue that the monopolist receives from each different level of output. The fourth column reports the monopolist's marginal revenue that is just the change in total revenue per 1 unit change of output.
How a Profit-Maximizing Monopoly Chooses Output and Price
Consider a monopoly firm, comfortably surrounded by barriers to entry so that it need not fear competition from other producers. How will this monopoly choose its profit-maximizing quantity of output, and what price will it charge?
Market Power and Monopoly
Our first assumption is that of market power, which states that everybody is a price taker, or that there are many buyers and sellers in a market. In this case, the equilibrium price in a market is defined by so many different transactions that anybody who wishes to buy or sell in this market has to do so at the market equilibrium price, and they are not able to move the equilibrium price with their own actions. Hence, you have to "take" whatever the price is. If you are able to move the equilibrium price with your own choices, then you can be referred to as a "price-setter. These include:. This is the most extreme, but not the most common, example of market power. A monopoly is a market with only one seller.
Monopolies, as opposed to perfectly competitive markets, have high barriers to entry and a single producer that acts as a price maker. A market can be structured differently depending on the characteristics of competition within that market. At one extreme is perfect competition.
Monopolistic Competition in the Long-run