Question

Using a diagram explain the price and output behaviour of a monopoly firm and why it is argued that such monopoly behaviour is inefficient.

Word limit - 160 words

Answer 1

Ans) Monopoly is when there is single seller selling unique product. A monopoly firm has pricing power. Marginal revenue curve of a monopolist lies below its demand curve. A profit maximising firm produces the quantity where MR and MC curve intersect and then uses demand curve to determine the price.

Monopolist produces less quantity than the socially optimal quantity. And does not produce at minimum of ATC. So, it is unable to achieve productive efficiency. Further, it charges more price than its marginal cost. Due to which a monopolist does not achieve allocative efficiency as well.

Since monopolist does not produce socially optimal quantity and charges high price, it is inefficient. It is because there are still many consumers who value the good, produced by monopolist, above the marginal cost but below the price charged and are unable to buy it. This efficiency is represented as deadweightloss in the graph. It is deadweightloss because the loss is not gained by someone else.

The above graph shows that if this firm were to be Perfectly competitive then it would have produced 110 units and would have changed $5. Where it would have been both productively and allocatively efficient.

But when this firm operates in monopoly, it charges $10 and produces 100 units. This makes it both productively and allocatively inefficient.