![]() ![]() A firm that expanded its scale of operation to achieve an average total cost curve such as ATC2 could produce 240 units of output at a lower cost than could the smaller firms producing 20 units each. Suppose there are 12 firms, each operating at the scale shown by ATC1 (average total cost) in Figure 10.1 "Economies ![]() Will have lower unit costs than its rivals, it can drive them out of the market and gain monopoly control over the industry. If this is the case, one firm in the industry will expand to exploit the economies of scale available to it. The LRAC of any one firm intersects the market demand curve where long-run average costs are falling or are at a minimum. Utilities that distribute electricity, water, and natural gas to some markets are examples. If long-run average cost declines as the level of production increases, a firm is said to experience economies of scale.įirm that confronts economies of scale over the entire range of outputs demanded in its industry is a natural monopoly. Scale economies and diseconomies define the shape of a firm's long-run average cost (LRAC) curve as it increases its output. Although these barriers might allow one firm to gain and hold monopolyĬontrol over a market, there are often forces at work that can erode this control. These barriers may be interrelated, making entry that much more formidable. Position in the ownership of some of the inputs required to produce the good, and government restrictions. They include economies of scale, special advantages of location, high sunk costs, a dominant Why are some markets dominated by single firms? What are the sources of monopoly power? Economists have identified a number of conditions that, individually or in combination, can lead to domination of a market by a single firm and create barriers thatīarriers to entry are characteristics of a particular market that block new firms from entering it. The result is a model that gives us important insights into the nature of the choices of firms and their impact on the economy. Our analysis, not to describe the real world. As always with models, we make the assumptions that define monopoly in order to simplify Such conditions are rare in the real world. In assuming blocked entry, we assume, for reasons we will discuss below, that no other firm can enter that market. In assuming there is one firm in a market, we assume there are no other firms producing goods or services that could be considered part of the same market as that of the monopoly firm. We shall see in the next chapter that monopolies are not the only firms that have this power however, the absence of rivals in monopoly gives it much more price-setting power.Īs was the case when we discussed perfect competition in the previousĬhapter, the assumptions of the monopoly model are rather strong. A firm that acts as a price setter possesses monopoly power. The entry of new firms, which eliminates profit in the long run inĪ competitive market, cannot occur in the monopoly model.Ī firm that sets or picks price based on its output decision is called a price setter. It selects from its demand curve the price that corresponds to the quantity the firm has chosen to produce in order to earn the maximum profit possible. In the case of monopoly, entry by potential rivals is prohibitively difficult.Ī monopoly does not take the market price as given ![]() Not only does a monopoly firm have the market to itself, but it also need not worry about other firms entering. There are no close substitutes for the good or service a monopoly produces. Monopoly is at the opposite end of the spectrum of market models from perfect competition. Define what is meant by a natural monopoly.List and explain the sources of monopoly power and how they can change over time.Define monopoly and the relationship between price setting and monopoly power.He has written for various print and online publications and wrote the book, "Appearances: The Art of Class." Evans holds a Bachelor of Arts in organizational communication from Rollins College and is pursuing a Master of Business Administration in strategic leadership from Andrew Jackson University. Keith Evans has been writing professionally since 1994 and now works from his office outside of Orlando.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |