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A. Compare the competitive price charged and quantity produced under perfect competition and monopoly. Other than identifying the presence of only one producer under monopoly, why do we tend to see this differential? B. Does a monopolist achieve efficiency in its production (that is, does it produce where MR = MC)? Will society face a welfare loss in a monopolistic market? A monopolist will not achieve efficiency in its production; instead it creates a deadweight loss by restricting its supply. In order to a firm to achieve efficiency, it needs to continue produce when the demand curve is above the marginal cost curve and reduce production when the demand curve is below the marginal cost curve. As seen in the graph (triangle D and B), monopolies create a welfare loss to society by reducing output and charging a price that is higher than marginal cost. The welfare loss is also seen because the marginal cost of increasing output is lower than the marginal benefit of increasing output. C. Applying University Core Values of responsible stewardship to this question, would you consider that there is never good cause to allow monopolies to operate? Please take into consideration your answer to Part (b). When applying university Core Values of responsible stewardship to the question on if monopolies should be able to operate I believe the answer is no. university Values of responsible stewardship state “Our Creator blesses us with an abundance of resources. We must be resourceful. We must optimize and apply all of the resources of our community”. In my opinion a monopoly is being selfish when it comes to the abundance of resources our Creator has blessed us with. There are billions of people in this world, which is enough for everyone under perfect completion to be efficient and profit. An example of a local monopoly would be Virginia Dominion Power. There are millions of people in this state, most of all who need their services of power. Even if power companies were under perfect competition, there would always be plenty of people to be in demand of their services, allowing everyone to have their fair chance at making profit. |
Note : this core value they are talking about.Responsible Stewardship- Our Creator blesses us with an abundance of resources. We foster a spirit of service to employ our resources for University and community development. We must be resourceful. We must optimize and apply all of the resources of our community to fulfill University’s mission and goals.
Today’s discussion brings to us the thought provoking discussion of monopoly and perfect competitive market pricing and quantity adjustments. Refereing to our text; Economics: Micro and Macro, pages 489, 490, figure 15-5, we are giving a chart that formulates both and equilibrium demand/marginal cost (perfectly competitive market) curve and a marginal revenue/marginal cost curve (monopoly market). For the competitive market, demand must equal or intersect the marginal cost (MC). The MC is the point in which the invisible hand has adjust quantity delivered to that of the suggested price. Speaking to figure 15-5, this is the point where MC=Demand to set quantity at QC and price at PC. At a perfect economy we have allowed the invisible hand to set the stage for price and quantity produced where the market is competitive and demand is elastic. Moving forward we apply the monopolistic theory in which profits of supply and demand can be determined on a firm quantity produced if average total costs (ATC) are constant to average variable cost (AVC). As discussed above in a perfect economy where a price is determined by the invisible hand, monopolies tend to skew the data to maximize profits when possible. How does one do so? Refereing again to figure 15-5 we see that our MR is also downward sloping in reference to the demand curve. Monopolies set the quantities at a point where MR=MC; the intersection point. When the firm does this it sets the quantity at QM thereby raising the price to PM. We see this differential for several reasons. Two of which are, maximize profits, or limit losses to a firm where ATC is above the demand curve. With the monopoly discussed in depth, we can begin to ask and answer is the monopoly firm can produce efficiently and if not will it cause a dead weight loss?
Again refering to figure 15-5, we see that our monopoly firm has set QM to a level in which it receives PM as its base line price. I believe it will find itself to be efficient without more information. A key element to the efficiency rule is how the firm responds to the marginal cost. With an increasing marginal cost and a firms ability to produce a decreased amount for higher prices the firm can operate at a lower cost allowing it to be efficient. What may hamper this efficiency is if a new firm inters the market, or even more simply if buyers take advantage of finding substitutes for the product being monopolized. This brings us to the discussion of deadweight loss. In our example given in figure 15-5, we can clearly see a dead weight loss to society in our shaded areas of B and D (areas above and below the equilibrium price where PC=QC). Where the marginal cost of increasing output is lower than the marginal benefit of increasing output, there will always be a welfare loss; hence why in this example we have proven again efficiency.
Our core values of responsible stewardship reminds us all of the abundance of resource our creator blesses us with and that we are to use the resources conservatively and moreover, to aid our community to achieve its goals responsibly. Monopoly as discussed above come in many forms for many reasons, reasons which happen naturally or without ill intentions. Often times barriers exist to halt firms from entering into the marketplace; this is typically where small economies to scale exists. For example, I come from a small community of 1500 people. In this town we have one small grocery store for its citizen; by definition they have a monopoly on the grocery buisness. They however have higher prices but not for ill intentions. It just so happens it costs more to bring the items to market in our community.
Allowing monopolies to exists outside the reason of natural existence should always be scrutinized. Take for instance Standard Oil or Carnegie Steel; whom for decades reaped the benefits far above the set equilibrium that would be offered. Because of much of what those firm did many suffered to the greed and plunder.
Colander, D.C. (2011). Economics: macro and micro (Custom). New York: McGraw-Hill
Unknown, (2013, Nov 30) Monopolies. www.econ.ohio-state.edu/jpeck/H200/EconH200L12/
