Question

a.   How does monopoly arise? Give two reasons and explain one of them.
b.   State the profit-maximizing conditions under monopoly.
c.   What are the key differences between profit-maximizing conditions under monopoly vs perfect competition?
d.   Is monopoly efficient? Is monopoly fair? Why do we put up with monopoly?

Answer 1

a. A monopoly can arise due to two main reasons.

• If a firm is a sole producer of a good or is a sole owner of a resource.

1. Barriers of entry - if the government imposes barriers to entry, other firms cannot enter the market which allows a single firm to function in the whole market. There are many barriers to entry. For example :

• Patents, copyrights - the patents gives the monopoly firm the sole right to produce or use the existing resources, while copyrights give a monopoly firm to reproduce or reuse the various goods and services.
• Control of physical resources - when a firm has control over any scarce resource then it is said to enjoy a natural monopoly power.

b.

• The profit maximizing conditions for a monopoly is similar to the profit maximization conditions of other competitive markets.
• A monoplist set their output quantities and prices at a point where the profit is maximized.
• The profit maximizing point is a point where the marginal cost equals the marginal revenue and the quantity of output and the price at this point are the profit maximizing output and the profit maximizing price.

c.

• The main key difference between a perfect competition and a monopoly is that a monopoly sets its price above the marginal cost while the Marginal cost equals the price for a perfectly competitive firm.
• At this point a perfectly competitive firm earns a zero economic profit as price and cost are set equal to each other.
• A monopoly earns positive economic profits because the prices at which they supply their goods and services exceeds the production costs incurred by them.

d.

• A monopoly is inefficient in real terms as it charges higher prices for its goods and services which exceeds the marginal cost.
• As they are the sole producer's of certain goods and services, they charge Higher rates and thus face negatively sloping demand curve.
• Monopoly can sometimes be fair as its rules apply to all the customers but sometimes it can also voilate it as it consists of a single firm enjoying all the market power.
• This firm can use unfair practices like price fixing as the customers do not have any more choices.
• Even though, monopolies harm the Economy and it's people, it is sometimes desirable as they provide unique goods and services that are not available in other markets.
• Monopoly also practices price discrimination so that it charges less for the people who are unable to pay and charges more for the people who are both able to and Willing to pay.