Monopolies that make super normal profits aren’t in the public

Monopolies that make super normal profits aren’t in the public

interest because they could charge a lower price than they do.

Introduction: Monopoly is an emotive word, and the immediate reaction

is that it should be replaced with competition. In this investigation

we are going to look at what is a monopoly, what are barriers to entry

and what types of barriers there are, what are normal and supernormal

profits and to they bear any benefits to the public.

What is a monopoly?

Monopoly is a market situation in which there is a single seller of a

product and there are no close substitutes of this product in the

market. The firm has all the market to its self and the customer

depends on the firm for the supply of the product. The monopolists are

the industry and the firms demand curve is also the market demand

curve. In this case the firm has some discretion over the price it

charges. The firm may increase or decrease the price with out fear of

retaliation form other firms. We may consider that there is no

interdependence in this market, there in one firm only. Finally it is

worth mentioning that the firm may change its demand curve by for

example, advertising.

(Introductory Economics, a first approach to the study of economics by

Mike Cunningham 1994)

Why do monopolies exist? There are several reasons. The source of

Polaroid’s monopoly power is its penitent on instant camera

technology. No firm can copy Polaroid’s process of making instant

pictures. Penitent laws are one kind of barriers to entry that prevent

other firms form entering the industry.

Barriers to entry

A barrier to entry is a condition that precludes firms from entering

and industry to compete for profits. Barriers exist when new firms

find it difficult to enter the market. If such barriers exist the

elasticity of supply will be less that if no such barriers existed.

Barriers that prevent such firms form entering a monopoly industry

include economies of scale, government licensing, penitents, and

exclusive control over an important resource.

Economies of scale

Suppose that five firms currently that share a market and that each

sells 100 units of output at a break even price of £10 per unit. If

new technology was developed enabling a single firm to produce 500

units of output at a price of £5 per unit. One of the firms would take

advantage ...

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...al profits. Economic profits consist of the surplus of the

firms’ revenues over the cost of production, including opportunity

cost. Some economists would define economic profits as profits great

enough to allow the firm to expand; however, the existence of

supernormal profits does not necessarily mean that the firm will

expand, so this definition must be used carefully. Supernormal

profits are profits that are greater than the rate necessary to

maintain the established level of production.

Conclusion

Spontaneous monopolies may abuse their fortunate position in order to

make high profits and sell their products at higher prices to achieve

those high profits. A firm in a monopoly position may charge the

customers a high price for a product with low quality. A famous

example comes form the United Stated with Microsoft having a monopoly

of 85% in the software industry.

Bibliography

Modern Economics Sixth Edition by Jack Harvey

Principles of Economics by William S. Brown

Introductory Economics, a first approach to the study of economics by

Mike Cunningham 1994

Foundations of Economics Second Edition by David Begg, Stanley

Fischer, Rudiger Dornbusch