SOLUTION: Monopoly, besides, is a great enemy | My Assignment Tutor

Economics 201 Microeconomics Monopoly (Chp 10) Monopoly, besides, is a great enemy to good management… Adam Smith[1] A monopoly exists when one firm provides a good or service – the firm is the industry. This happens when: There are no close substitutesNew firms cannot set up to compete. The first is self- explanatory. However, such monopolies are at risk from technological development and innovations. China for example, has about 98% of the world’s rare earth elements (REEs). These naturally occurring elements are essential in very small quantities in all kinds of high tech products (phones, computers, medical and military technology). There are no close substitutes but countries around the world looking for other deposits of REEs and are researching alternative products. The problem for new firms is barriers to entry, that is, they cannot easily set up in business. This can be as a result of: legal restrictionsnatural monopoliesfirst mover advantage The first deals with patents and copyrights – another firm may be prevented from using or have to pay to use a patented good/service. The idea is to promote innovation by protecting the rights of the inventor. This also includes government licences and regulation. Canada Post has a government imposed monopoly on mail (not parcels). The idea is that something that is thought to be crucial to the economy has to be controlled to ensure it works dependably. Similarly, professional regulations ensure standards in important industries – people cannot call themselves doctors, electricians, accountants or speech and language pathologists unless they have the qualifications to do so. Natural monopolies occur when the average costs of production fall as output increases (economies of scale). This means that one firm can provide a good cheaper than two could (assuming that they each had to have separate production plants). E.g. hydroelectric power plants are expensive and one big operation (dam, generators etc) would be cheaper than two smaller firms. We will deal with this later. First mover advantage happens when a firm is first to the market and prevents other firms from competing. For example, once the firm is established, it can reduce running costs as it moves along the learning curve, new firms will have higher costs and so may not be able to compete on price. Similarly, it can establish brand loyalty with consumers, making it harder for new firms to market their product. The key to the market analysis of the monopoly is in the demand and MR curves. The MR is always less than the price (compare it to perfect competition in which they are equal). (p538) P D MR Q This happens because in order to increase the quantity sold a firm has to reduce the price (to p2). But the firm can’t sell at a lower price to the new customers and a higher price to the existing customers.[2] They have to reduce prices to all consumers. Remember that marginal revenue is the change in total revenue when output increases by one unit. Now the total revenue falls by more that the price to the extra customer – it falls by the reduction in price to all the customers. A firm sells ten shirts at $10.00 each, then the total revenue is $100. But they have to lower the price to $9.50 to sell one more shirt. The problem is that they have to sell all the shirts at $9.50 (not just the 11th shirt), so the total revenue is 11x 9.5 = $104.5. So the MR from selling the 11th shirt is now $4.5 (the change in total revenue from selling one more unit). So MR