The Rest of Markets - 2
The Rest of Markets - 2
The Rest of Markets - 2
Economic C
ATC
Profit
MR
Price
The above diagram shows the economic profits that can be maintained
in the long run because of the barriers to entry into this industry. The
monopolist produces where MC= MR
On the other hand, there is nothing in the analysis that requires any given
monopolist will be profitable. In fact, a monopolist can operate at an
economic loss, the same as a competitive firm can but only in the short run,
as in the long run he will gain economic profit.
MONOPOLY
Many Firms
At profit maximization, MC = MR, and output is Q and price P. Given that price
(AR) is above ATC at Q, supernormal profits are possible (area PABC).
As new firms enter the market, demand for the existing firm’s products becomes
more elastic and the demand curve shifts to the left, driving down price. Eventually, all
super-normal profits are eroded away.
Super-normal profits attract in new entrants, which shifts the demand curve
for existing firm to the left. New entrants continue until only normal profit is
available. At this point, firms have reached their long run equilibrium.
Key characteristics
The main characteristics of firms operating in a market with few close
rivals include:
Interdependence
Firms operating under conditions of oligopoly are said to be
interdependent , which means they cannot act independently of each other.
A firm operating in a market with just a few competitors must take the
potential reaction of its closest rivals into account when making its own
decisions
1) The figure above shows the demand and cost curves for a single-price monopolist. What level
of output maximizes the firm's economic profit?
A) 0 units B) 50 units C) 20 units D) 30 units
30 0 10
25 1 20
20 2 25
15 3 40
10 4 60
5 5 85
1) The table above shows the demand and costs for a single-price monopolist. The firm will
A) maximize profits by producing 2 units.
B) operate on the elastic portion of its demand curve.
C) operate on the unit elastic portion of its demand curve.
D) maximize profits by producing 3 units.