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Monopoly and monopolistic competition

1) Are monopolists guaranteed of making economic profits?

2) Explain the long run equilibrium situation for a monopolistically competitive industry. Give two examples of industries that fit under this category.

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1) Are monopolists guaranteed of making economic profits?
Answer:
Yes. In the absence of any competitor consumers are left with no choice but to purchase whatever the monopolist would sell. Quality of the product or service is not a question in a monopolistic market. The consumer's decision is either "take it or leave it".

But the monopolist cannot charge any price they like. It is true that a firm with monopoly has price-setting power and will look to earn high levels of profit. However the firm is constrained by the position of its demand curve. Ultimately a monopoly cannot charge a price that the consumers in the market cannot afford.

Reference: Tutor2U, "Output under a pure monopoly". http://tutor2u.net/economics/content/topics/monopoly/monopoly_profits.htm. Accessed March 27, 2011.

2. Monopolistic Competition, Long-run equilibrium conditions:

The long-run equilibrium of monopolistically competitive industry generates six specific equilibrium conditions: (1) economic inefficiency (P > MC), (2) profit maximization (MR = MC), (3) market control (P = AR > MR), (4) breakeven output (P = AR = ATC), (5) excess capacity (ATC > MC), and (6) economies of scale (LRAC > LRMC).

Let us examine these conditions.

(1) economic inefficiency

The condition that price is greater marginal cost (P = MC) means that production does NOT achieve economic efficiency. This means that resources are not being used to produce goods that generate the greatest possible level of satisfaction.

Example:
In long-run equilibrium the sandwich price is $4.95 but the marginal cost of sandwich production is $4.65.

* From the buyers viewpoint, this $4.95 price means that they receive $4.95 worth of satisfaction from consuming a sandwich. If buyers did not enjoy $4.95 worth of satisfaction, then they are not willing to pay $4.95. As ...

Solution Summary

Monopoly and monopolistic competitive industry with examples of industries under monopolistic competition.

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