Firms and companies all operate within different market structures; their market structure is a reference to the number of firms within the market and the type of competition between them. Economists split the market into four sections; perfect competition, monopolies, monopolistic competition and oligopoly. Monopolies come in two main forms. The pure monopoly, when a firm is “the sole supplier and potential supplier of the industry’s product” (Begg, et al., 2014) is highly theoretical because to qualify as a pure monopoly power you have to face no national or international competition, for example Airbus. Airbus is the only producer of large aeroplanes within Europe which may suggest they are a monopoly but they face competition on an international
…show more content…
Competitive firms are known as a ‘price-taker’ as their prices are dictated by the other firms in the market, whereas a monopolistic firm is a ‘price-setter’ as they set the price as high as the consumer is willing to pay. This can lead to supernormal profits. Supernormal profits are normally eliminated within the competitive market by the entry of new firms which causes a fall in price. With no fear of a competitor entering the market you remove the ability to prevent long term supernormal profits. Figure 1. Shows the increased profits a monopolistic firm can make from production where the average cost meets the marginal revenue, but the price is set by the demand …show more content…
Monopolies are seen to be profit maximising, they wish to manufacture as little as possible with the biggest profit margins while still meeting demand. In comparison the competitive market manufactures at the point which is most efficient, usually where the marginal cost of production meets the average cost ( by default, where average cost is at its lowest) because this is where the product is cheapest to produce, i.e. the optimal output. Hicks wrote ‘the best of all monopoly profit is a quiet life’ this refers to the idea that monopolies don’t need to be productively efficient and produce at this optimal point, as illustrated by figure 2. This creates a deadweight loss - a loss in the social surplus as the monopoly is creating less than the consumer is demanding- and there is a restriction of output in comparison to perfect competition. The failure to maximise social surplus is the social cost of a monopolistic
Competitive firms are known as a ‘price-taker’ as their prices are dictated by the other firms in the market, whereas a monopolistic firm is a ‘price-setter’ as they set the price as high as the consumer is willing to pay. This can lead to supernormal profits. Supernormal profits are normally eliminated within the competitive market by the entry of new firms which causes a fall in price. With no fear of a competitor entering the market you remove the ability to prevent long term supernormal profits. Figure 1. Shows the increased profits a monopolistic firm can make from production where the average cost meets the marginal revenue, but the price is set by the demand …show more content…
Monopolies are seen to be profit maximising, they wish to manufacture as little as possible with the biggest profit margins while still meeting demand. In comparison the competitive market manufactures at the point which is most efficient, usually where the marginal cost of production meets the average cost ( by default, where average cost is at its lowest) because this is where the product is cheapest to produce, i.e. the optimal output. Hicks wrote ‘the best of all monopoly profit is a quiet life’ this refers to the idea that monopolies don’t need to be productively efficient and produce at this optimal point, as illustrated by figure 2. This creates a deadweight loss - a loss in the social surplus as the monopoly is creating less than the consumer is demanding- and there is a restriction of output in comparison to perfect competition. The failure to maximise social surplus is the social cost of a monopolistic