Question

Show using diagrams that a profit-maximizing dominant firm (with a competitive fringe) can produce either higher or lower quantity of goods than if it were a profit-maximizing monopolist. Show also their corresponding profits in these two scenarios.

Answer 1

A profit-maximizing dominant firm (with a competitive fringe) can produce either higher or lower quantity of goods than if it were a profit-maximizing monopolist. One of the basic objectives of a majority of firms is to maximize the profits. Greater the profits earned by a firm greater is the supply of the commodity and vice-versa.

The following three conditions must hold if a profit maximising firm produces positive level of output (say equilibrium output Q*) in a competitive market:

1) MR must be equal to MC at Q*.

2) MC should be upward sloping or rising at Q*.

3) In short run − Price must be greater than or equal to AVC. i.e. P ≥ AVC at Q*.

In long run − Price must be greater than or equal to LAC.

By restricting output and raising price, the single price monopolist captures a portion of the consumer surplus. Since output is restricted, a portion of both the consumer and producer surplus is lost. This loss of economic surplus is known as deadweight loss, that neither the consumer nor the producer enjoy.

Monopolies may also suffer from what is called x-inefficiency. X-inefficiency arises when costs creep up due to lack of competition and/or actions pursued by the monopolist to protect its monopoly position. These monopoly protecting actions are also called rent-seeking activities.

So, All in all, The main objective of any business is to earn higher profits. But, this cannot be the only objective as the business needs to cater the demands and requirements of the various parties who are interested in the business. Therefore, the business needs to focus on the performance of each and every area for survival in the market. For this, there should be other objectives such as fulfillment of social responsibility, innovations, efficient use of natural resources, etc. Thus, it can be said that the business needs the multiple objectives.