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Microeconomics Monopoly and Competition - Essay Example

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Simpson (2010) explains that monopoly powers in a market results from exclusive rights that are granted to certain firms which include the ownership of scarce economic resource or copyrights and patents regarding certain ideas or designs. Merging of two firms could result in a…
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Microeconomics Monopoly and Competition
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Download file to see previous pages This cannot be the case in competition because competitive markets many firms produce differentiated products that can be substitutes to each.
Given that they manage large market share without competition, monopoly firms charge relatively high prices for their products compared to firms in a competitive market. In regards to this, Simpson (2010) explains that firms with monopoly power restrict the amount of output that they produce in order to raise prices of that output. They then set the prices based on their production costs in relation to quantity of output. Without the presence of close substitutes to their products and the high prices, monopoly firm are able to enjoy super-normal profits which are maximized when the marginal cost of production equals marginal revenue.
The efforts to implement their pricing policies, monopolies cause inefficiencies in the market which include reduction in consumer welfare. The consumer welfare enjoyed through the prices in a competitive market reduces when the prices of monopolies apply (Simpson, 2010). This is what leads to dead weight which is illustrated in the graph 1 below. In a competitive market, the price of products is at the point where the marginal cost (MC) equals to market price which corresponds to price P. based on this price level, consumers in the competitive market will enjoy a large consumer welfare which is represent by area EBF in the graph. Monopolist should then set their prices where profits are maximum and that the point C in the graph where marginal cost equals marginal revenue (MR). However, monopolists will instead set their prices at a higher point based on the average revenue (AR) which is shown in the graph as point A which corresponds to price P1 higher than P which the competition price.
The high prices set by monopoly firms will then reduce the consumer welfare and result in other inefficiencies in the market. The consumer which is represented by ...Download file to see next pagesRead More
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