Micro Economics Essay Example | Topics and Well Written Essays - 2000 words

Micro Economics - Essay ExampleThe maximization of moolah by a monopolist is shown in the diagram below. The necessary condition is that the fringy make up equals the marginal revenue and the sufficient condition is that the marginal cost curve has a greater slope than the marginal revenue curve at the intersection (Koutsoyiannis, 1975). Observe since the equilibrium price is higher than the average cost of production the equilibrium output, the monopolist makes a profit. This profit is shown as the shaded region in the diagram. Figure 1Monopolists equilibrium A typical reason for monopoly to occur is increase returns to scale. If a particular firm has increasing returns to scale in any particular commodity, it has a natural advantage over any former(a) firms in that market. This situation is known as natural monopoly. Monopoly crapper also occur by regimen regulation. There can be particular sectors in the deliverance that government run institutions run. Private entreprene urship is not allowed. It may also be these industries require so high overhead costs private producers cant afford it. The biggest disadvantage of monopoly is that it leads to exploitation of consumers. Particularly, this is true if the monopolist uses price discrimination to extract the wide-cut consumers surplus. However, as first argued by Schumpeter (1950), the monopolists extraction of surplus is essential for economical growth. In competitive markets, the producers have to be content with zero profits. Investment returns ar normal. Consequentially, the firm cannot habilitate in research and development which drives technological growth and innovation. However, since the monopolist is able to derive a surplus, it can invest this in research and development funds to attain technological competence. This is crucial for the monopolist or other big firms in order to retain their status as market leaders. And typically, technological innovation is what drives economic growth si nce it enables the resources of the economy to become more productive thereby breaking free of capacity constraints (Varian, 2006). Therefore, an economy can have benefits as strong as damages if a monopolist is in register of a particular market. Monopolistic competition however is a market which combines features of Monopoly as well as perfect competition. Monopolistic competition is a market comprising of numerous buyers and sellers. However, unlike perfect competition, here products are differentiated. E precise seller thus is a monopolist for his own product (Ison & Stuart, 2006). The producers now are not mere price takers. They simultaneously set price and quantity to maximize prices. However, entry is costless and then as long as there are positive profits, new firms enter the industry. As a result, monopolistically competitive firms can only earn zero profits in the long run equilibrium (Varian, 2006). Typically, monopolistically competitive markets are what we observe t he most in the real world (Koutsoyiannis, 1975). Markets start off with very few producers, but attracted by profits new firms enter. As competition intensifies, firms try to differentiate their products through advertising or introducing new varieties. The biggest advantage of monopolistic competition is that firms offer horizontally as well as vertically differentiated products and this results in better matches with consumer preferences. In the long run, there are no barriers to entering or exiting the market. As long as firms make supernormal profits, new firms