MBA - Economics - MicroEconomics - Essay Example

They are characterized by a lack of economic competition for the good or service that they provide and lack of viable substitutes. Results would show that under the Perfect Competition scenario, attaining profit maximization equilibrium at the given equations for cost and pricing would result to a loss for the company. The output may be high and the price low as compared to the Monopoly scenario but the overall effect is that the company does not gain from the venture. It is not surprising that it turned out that the firm will profit more from the monopoly situation because consumers do not have any alternative.

Monopolies are expected to produce less and set it a higher price because there is no substitute available on the market. Consumers need the product and so they will buy in at whatever price is set thereby resulting to a decline in social welfare. The lack of competition results to less concern for efficiency and innovation. Products would experience little or no improvement. Since there are no available substitutes the consumer is forced to use the product which further leads to decrease in consumer welfare.

Nonetheless, there is a concept which states that the loss of efficiency of firms can raise a potential competitor's value enough to overcome market entry barriers or provide incentive for research and new alternatives. The government may even step in and break the monopoly. According to the theory of contestable markets, monopolies can be forced to behave as if there were competition because of the risk of losing their monopoly to new entrants especially when barriers to market entry are low.

It might also be because of the availability in the longer term of substitutes in other markets. This is seldom the case however. Under the perfect competition, we were able to determine that the firm would be making a loss. Does it follow then we should stop production The answer lies on considerations of different total costs levels and whether the firm is operating in the short run or in the long run. Why do even question whether it should continue or not Common sense would tell us that if we are not gaining anything from a venture then we should withdraw from it.

However, production entails fixed costs which the firm should account for whether they manufacture or not. It may turn out that continuing production would be enough to cover the fixed costs. When the firm is geared for short run perspectives but is registering losses, it is advisable that it should still continue production provided that the Total costs (TC) is greater than total revenue (TR) and that total revenue is equal to total variable cost (TVC). If it fails to achieve one of these conditions, then it would be advisable to shut down so that they will only pay for the fixed costs.

Even if the firm stops producing, it will have to continue to meet the level of fixed costs. Since whether the firm produces or not, it will have to pay fixed costs, it is better for it to continue production in an attempt to decrease total costs and increase total revenue, thus making profits. In the long run scenario, the condition to continue producing requires the price P to be higher than the Average Total Cost. If P is equal to ATC, the firm is indifferent between shutting down and continuing to produce.

This case is different from the short run shut down case because in long run there's no longer a fixed cost because everything