Question

In: Economics

How do barriers to entry allow a monopolist to earn economic profits in the short run...

How do barriers to entry allow a monopolist to earn economic profits in the short run and the long run? Why does the elimination principle eliminate economic profits in the long run for a purely competitive firm but doesn't do so for a monopolistic firm?

Solutions

Expert Solution

A monopoly is the situation of the market where only a single seller/producer in the market with no competition and no close substitute for his product.  Barriers to new entry id one among the crucial reason of maintaining monopoly without any competition, which makes monopolist to earn the economic profit ( Price id grater than MC) also known as a supernormal profit. A monopolist can set any price as he is the price maker but as in perfect competition higher price level and economic profit attract the new firm in the market, this is not feasible in a monopoly market. There is the entry on the barrier of a new firm in monopoly because of the economies of scale, control on key raw material, property rights, legal barriers, etc. which creates the monopoly power of monopolist on the price and output level.

The elimination principle says that above-normal profit is a temporary phenomenon. this elimination principle eliminates economic profit in the long for a purely competitive firm because in the perfect competition there is the free entry and exit of firms. economic proftt attracting new firms increases the supply and reduces the price level until all economic profit gets eliminated. In the long run there is no barrier to entry and exit in a monopolistic market which eliminates all economic profit.

In case if there will be any economic profit it might be because of some control on the price level as its an imperfect market.


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