Question

1. draw a diagram to show the long run equilibrium condition of the perfectly competitive firm

2. explain three reasons why monopolies arise

Answer 1

a) The below diagram shows the equilibrium in the long run in a perfectly competitive market. In the long run, the firm will only be breaking even i.e. no profit and no loss. The production will occur at the lowest point of the LAC (Long run average cost) and at this point, the LMC (Long run marginal cost) and Average revenue will be equal to marginal revenue and price.

2) Three reasons why monopolies arise are:

• Economies of scale: A single firm can produce at a lower cost and supply in the whole market efficiently and at a lower cost rather than needing many small different companies to provide the same amount.
• Access to raw material or technology: If only one firm in the market has access to the raw material needed for production or the technology needed for the production of goods it will create a monopoly of that firm in the market.
• Monopoly by law: Patents, copyright etc create a monopoly in the market of the firm holding the patents. It is created by government law to help the company benefit from its innovation.