Marginal cost Essay

1 Monopoly Why Monopolies Arise? Monopoly is a rm that is the restore seller of a crop without close substitutes. The fundamental cause of monopoly is barriers to first appearance A monopoly re master(prenominal)s the only seller in its market because different rms chiffoniernot enter the market and compete with it. Barriers to entry have three main sources 1. Monopoly Resources. A key resource is owned by a angiotensin-converting enzyme rm. Example The DeBeers Diamond Monopolythis rm tames about 80 percent of the diamonds in the world. 2. Government-Created Monopolies. Monopolies can arise because the presidential term grants one person or one rm the soap right to sell some sincere or service.Patents are issued by the political sympathies activity to give rms the exclusive right to professional personduce a product for 20 years. 3. Natural Monopoly a monopoly that arises because a single rm can cede a impregnable or service to an entire market at a smaller exist than could two or more rms. A native monopoly occurs when there are economies of scale, implying that average full(a) cost waterfall as the rms scale becomes larger. Monopoly versus Competition The key di erence between a competitive rm and a monopoly is the monopolys ability to control hurt.The make draw ins that each of these types of rms faces is di erent as well. 1. A competitive rm faces a perfectly elastic gather up at the market terms. The rm can sell all that it wants to at this determine. 2. A monopoly faces the market demand burn because it is the only seller in the market. If a monopoly wants to sell more output, it must lower the price of its product. A monopolys fringy revenue go out always be less than the price of the good (other than at the rst unit sold). 1. If the monopolizer sells one more unit, his aggregate revenue (P Q) will rise because Q is getting larger.This is called the output e ect. 2. If the monopolist sells one more unit, he must lower price. This means that his substance revenue (P Q) will fall because P is getting smaller. This is called the price e ect. Remember that demand tends to be elastic along the upper lefthand peck of the demand curve. Thus, a abate in price causes total revenue to increase. Further down the demand curve, the demand is inelastic. In this region, a decrease in price results in a drop in total revenue (implying that fringy revenue is now less than zero).Pro t Maximization The monopolists pro t-maximizing bar of output occurs where peripheral revenue is equal to bare(a) cost. 1. If the rms marginal revenue is greater than marginal cost, pro t can be increased by raising the level of output. 2. If the rms marginal revenue is less than marginal cost, pro t can be increased by glum the level of output. Even though MR = MC is the pro t-maximizing rule for both competitive rms and monopolies, there is one important di erence. 1. In competitive rms, P = MR at the pro t-maximizing level of outpu t, P = MC . 2.In a monopoly, P MR at the pro t maximizing level of output, P MC . The monopolists price is determined by the demand curve (which shows us the willingness to accept of consumers). Question Why a Monopoly Does not Have a Supply Curve? 1. A supply curve tells us the quantity that a rm chooses to supply at any given over price. 2. But a monopoly rm is a price maker the rm sets the price at the same time it chooses the quantity to supply. 3. The market demand curve tells us how much the monopolist will supply. A Monopolys Pro t Pro t = TR TC Also, TR TC Pro t = Q Q or Pro t = (P ATC )Q Q The Welfare Cost of Monopoly The socially e cient quantity of output is found where the demand curve and the marginal cost curve intersect. This is where total excess is maximized. Because the monopolist sets marginal revenue equal to marginal cost to determine its output level, it will produce less than the socially e cient quantity of output. Public Policies Toward Monopolies 1 . Increasing Competition with antimonopoly Laws. Antitrust laws are a collection of statutes that give the government the authority to control markets and promote competition.Antitrust laws allow the government to prevent mergers and break up large, dominating companies. (a) The Sherman Antitrust deport was passed in 1890 to lower the market post of the large and berthful rusts that were viewed as dominating the economy at that time. (b) The Clayton Act was passed in 1914 it strengthened the governments ability to curb monopoly power and authorized private lawsuits. 2. Regulation. Regulation is often used when the government is dealing with a natural monopoly. Most often, regulation involves government limits on the price of the product.While we might believe that the government can eliminate the deadweight red from monopoly by setting the monopolists price equal to its marginal cost, this is often di cult to do. (a) If the rm is a natural monopoly, its average total cost curve will be declining because of its economies of scale. (b) When average total cost is falling, marginal cost must be lower than average total cost. (c) Therefore, if the government sets price equal to marginal cost, the price will be below average total cost and the rm will earn a loss, cause the rm to eventually leave the market.(d) Therefore, governments may choose to set the price of the monopolists product equal to its average total cost. This gives the monopoly zero pro t, but assures that it will remain in the market. Note that there is take over a deadweight loss in this situation because the level of output will be lower than the socially e cient level of output. 3. Public Ownership. quite than regulating a monopoly run by a private rm, the government can run the monopoly itself. However, economists generally prefer private ownership of natural monopolies than public ownership.4. Do Nothing. Sometimes the costs of government regulation overbalance the bene ts. Therefore, some economists believe that it is best for the government to leave monopolies alone. Question Should the government break up Microsoft? Price discrimination Price discrimination is the pedigree practice of selling the same good at di erent prices to di erent customers. Perfect price discrimination describes a situation where a monopolist knows exactly the willingness to pay of each customer and can charge each customer a di erent price.Without price discrimination, a rm produces an output level that is lower than the socially e cient level. If a rm perfectly price discriminates, each customer who values the good at more than its marginal cost will purchase the good and be charged his or her willingness to pay. 1. There is no deadweight loss in this situation. 2. Because consumers pay a price exactly equal to their willingness to pay, all surplus in this market will be producer surplus. Examples of Price Discrimination 1. Movie Tickets 2. Airline Prices 3. Discount Coupons 4. Fina ncial Aid 5. Quantity Discounts.