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"A)Show that, compared to perfect competition, monopolies reduce output and increase price. Does this mean that monopolies are always against the public interest"
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It looks for a price on the market demand curve that will maximize its profits- both in the short run and the long run. Unlike the perfect competition, the monopolists marginal revenue from each unit is not constant (Samuelson, 2010).
The table below shows that the demand increases as the price decreases-the basic downward sloping demand curve. However, the marginal revenue decreases as each unit of output is increased. Therefore, the monopolist raises the price and restricts output to maximize its returns (Samuelson, 2010).
Similarly, the monopolist will produce the number of units when its marginal cost is equal to the marginal revenue. This signifies that the there will be always be more demand than there will be supply to maximize the profits. (Samuelson, 2010)
Monopolies act against the public interest at large because they are productively inefficient, cause a welfare loss and earn exorbitant profits. Similarly, they control the price as well as the output to a certain extent; thereby injuring the public at large. However, there are arguments that monopolies help achieve economies of scale and help reduce per unit cost and maintain a high level of innovation to keep the demand curve stable. (Snook, 2013)
Snook, A. Is the Existence of Monopoly Against the Public Interest. Retrieved from http://www.courseworkbank.info/courseworkbank.info.php?f=R0NFIEEgLSBMZXZlbC9FY29ub21pY3MvSXMgdGhlIGV4aXN0ZW5jZSBvZiBhIG1vbm9wb2x5IGFnYWluc3QgVGhlIHB1YmxpYyBpbnRlcmVzdC5wZGY on March 24,
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Secondly, there must be no close substitute available for the product offered by the monopolist. Therefore, a sole provider of petroleum cannot be considered a pure monopoly as natural gas is a close substitute for heating or electricity purposes. Thirdly, due to some strong reason there must be barriers to entry and survival of potential competitors in the industry so that the firm’s monopolistic behavior and excessive profits could persist (Baumol, Blinder 2007).
One needs to find a trade off to maximize his utility. Besides that, there are several hindrances which force him to make rational decisions while apportioning resources effectively. This principle segregates market into two extreme continuums of market structure which are Monopoly and perfectly competition.
The market structure is a direct opposite of perfect competition because there are barriers to entry in form of legal restrictions, patents, regulations, tariffs, technical prowess etc. Other unique characteristics of a monopoly are its huge capital outlay and the existence of economies of scale, savings brought about by increases in quantities produced.
Generally viewed as having a negative impact on consumers, there are cases when a monopoly can be more efficient. Everyday we deal with monopolies that we may not recognize. Building a monopoly takes years and the effects of predatory practices may not be apparent for a considerable length of time.
Though there may be other operating systems available, non are comparable to the system that consumers have become dependent on. The ability of Microsoft to dictate not only price, but also the products that are introduced, indeed make it a monopoly.
Other manufacturers have attempted to enter into competition with Microsoft by the introduction of competing operating systems and may have success on the edges of the market.
The main issue in the case was whether Microsoft was allowed to bundle Internet Explorer web browser software with its Microsoft Windows operating system. This led to the browsers wars since all windows users had a copy of internet explorer this
The existence of monopolies in the economy presents challenges in the delivery of services, due to the inefficiencies associated with their existence. On this platform, laws geared towards the elimination of competition in most countries are illegal, but the existence of statutory monopolies challenges this perspective.
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