Perfect competition Essay

A profit maximiser increases output until MC=MR at Q1. The intersection of MC with MR gives the profit maximising level of output. The intersection of MC with MR gives the profit maximising level of output. To find the market price one must project up from Q1 to the demand curve and across the vertical price axis, P1. Consumers are willing to pay P1 for Q1. Unit costs are only P2 so the firm is making an abnormal profit of (P1-P2)*Q1. The four key characteristics of monopoly are: (1) a single firm selling all output in a market, (2) a unique product, (3) restrictions on entry into and exit out of the industry, and more often than not (4) specialized information about production techniques unavailable to other potential producers. These four characteristics mean that a monopoly has extensive (boarding on complete) market control. Monopoly controls the selling side of the market. If anyone seeks to acquire the production sold by the monopoly, then they must buy from the monopoly. This means that the demand curve facing the monopoly is the market demand curve. They are one and the same. The characteristics of monopoly are in direct contrast to those of perfect competition. A perfectly competitive industry has a large number of relatively small firms, each producing identical products. Firms can freely move into and out of the industry and share the same information about prices and production techniques. Single supplier: The essence of a monopoly is a market controlled by a single seller. The most important aspect of being a single seller is that the monopoly seller IS the market. The market demand for a good IS the demand for the output produced by the monopoly. This makes monopoly a price maker, rather than a price taker. Unique Product: To be the only seller of a product, however, a monopoly must have a unique product. There are no close substitutes. A monopoly is an ONLY seller of a UNIQUE product. Barriers to Entry and Exit : A monopoly is generally assured of being the ONLY firm in a market because of assorted barriers to entry. Some of the key barriers to entry are: (1) government license or franchise, (2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and (5) decreasing average total cost. A monopoly might also face barriers to exiting a market. If government deems that the product provided by the monopoly is essential for well-being of the public, then the monopoly might be prevented from leaving the market; Specialized Information Monopoly is commonly characterized by control of information or production technology not available to others. This specialized information often comes in the form of legally-established patents, copyrights, or trademarks. It could be a secret recipe or formula. Perhaps it is a unique method of production. While these create legal barriers to entry they also indicate that information is not perfectly shared by all. Natural Monopoly Sometimes markets become monopolies simply because it is more cost effective to have one firm serving an entire market than it is to have a number of smaller firms competing with one another. Firms whose economies of scale are virtually unlimited are known as natural monopolies, and the goods they produce are referred to as club goods. These firms come to be monopolies because their size and position makes it impossible for new entrants to compete on price. Natural monopolies are usually found in industries with high fixed costs and low marginal costs of operation, such as cable television, telephone, and internet providers. Legal Monopoly Sometimes a government will pass laws reserving a specific trade, product or service for government agencies. For example, many times a government agency will be in charge of running water. The legal barriers that are put up prevent other companies from competing with the government. Technological monopoly occurs when the good or service the company provides is has legal protection in the form of a patent or copyright. For example, if a company develops and patents a drug to cure brain cancer, that company has a legal monopoly over that drug.? Arguments for monopoly : – The beneficial effects of economies of scale, economies of scope, and cost complementaries on price and output may outweigh the negative effects of market power. – Encourage innovation.