potential benefits from monopoly

The debate about monopoly will never be settled! The consensus seems to be that the economic case for and against monopoly needs to be judged on a case by case basis  - particularly when assessing the impact on economic welfare.

The standard economic case against monopoly is that, with the same cost structure, a monopoly supplier will produce at a lower output and charge a higher price than a competitive industry. This leads to a net loss of economic welfare and efficiency because price is driven above marginal cost - leading to allocative inefficiency.

The diagram below shows how price and output differ between a competitive and a monopolistic industry. We have assumed that the cost structure for both the competitive firm and the monopoly is the same - indeed we have assumed that output can be supplied at a constant marginal and average cost.

Assuming that the monopolist seeks to maximise profits and that they take the whole of the market demand curve, then the price under monopoly will be higher and the output lower than the competitive market equilibrium.

AVERAGE TOTAL COST CURVE:

A curve that graphically represents the relation between average total cost incurred by a firm in the short-run product of a good or service and the quantity produced. The average total cost curve is constructed to capture the relation between average total cost and the level of output, holding other variables, like technology and resource prices, constant. The average total cost curve is one of three average curves. The other two are average variable cost curve and average fixed cost curve. A related curve is the marginal cost curve.

The average total cost curve is U-shaped. Average total cost is relatively high for small quantities of output, then as production increases, it declines, reaches a minimum value, then rises.

Because average total cost is a combination of average variable cost andaverage fixed cost, the U-shape of the average total cost curve is a result of both underlying averages. At small production quantities, both average fixed cost and average variable cost decline, resulting in a negatively-sloped average total cost curve.

AVERAGE VARIABLE COST:

Total variable cost per unit of output, found by dividing total variable cost by the quantity of output. When compared with price (per unit revenue), average variable cost (AVC) indicates whether or not a profit-maximizing firm should shut down production in the short run. Average variable cost is one of three average cost concepts important to short-run production analysis. The other two are average total cost and average fixed cost. A related concept is marginal cost.

Average variable cost is the total variable cost per unit of output incurred when a firm engages in short-run production. It can be found in two ways. Because average variable cost is total variable cost per unit of output, it can be found by dividing total variable cost by the quantity of output. Alternatively, because total variable cost is the difference between of total cost and total fixed cost, average variable cost can be derived by subtracting average fixed cost from average total cost.

Expectations Theory (With Diagram)

Inflation and Unemployment: Phillips Curve and Rational Expectations Theory!

In the simple Keynesian model of an economy, the aggregate supply curve (with variable price level) is of inverse L-shape, that is, it is a horizontal straight line up to the full-employment level of output and beyond that it becomes horizontal.

This means that during recession or depression when the economy is having a good deal of excess capacity and large-scale unemployment of labour and idle capital stock, the aggregate supply curve is perfectly elastic. When full employment level of output is reached, aggregate supply curve becomes perfectly inelastic.

Inflation-Unemployment Trade -Off: Phillips Curve:

However, the actual empirical evidence did not fit well in the above simple Keynesian macro model. A noted British economist, A.W. Phillips published an article in 1958 based on his good deal of research using historical data from the U.K. for about 100 years in which he arrived at the conclusion that there in fact existed an inverse relationship between rate of unemployment and rate of inflation.

The Short-Run Phillips Curve

KEY POINTS

• The long-run Phillips curve is a vertical line at the natural rate of unemployment, but the short-runPhillips curve is roughly L-shaped.
• The inverse relationship shown by the short-run Phillips curve only exists in the short-run; there is notrade-off between inflation and unemployment in the long run.
• Economic events of the 1970's disproved the idea of a permanently stable trade-off between unemployment and inflation.

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TERM

• Phillips curve
  A graph that shows the inverse relationship between the rate of unemployment and the rate of inflation in an economy.

Balance of Payments Equilibrium

Balance of payments equilibrium occurs when induced balance of payments transactions---those engineered by the government to influence the nominal exchange rate---are zero. This implies that autonomous receipts from exports and the sale of securities abroad equal autonomous payments for imports and the purchase of securities from foreign residents. Since changes in the stock of official reserves of foreign exchange are the method used by the authorities to fix or otherwise manipulate the exchange rate, balance of payments equilibrium requires that the stock of foreign exchange reserves be constant.
Induced transactions are frequent when the exchange rate is fixed---only by chance will autonomous receipts and payments balance. They can also occur when the exchange rate is flexible and the authorities want to influence its movement. But we will concentrate primarily on the fixed exchange rate case here.

Effects on Equilibrium in the Short and Long Run

The Firm vs. the Industry's Short-Run Supply Curve
A company will continue to produce output until marginal revenue (MR) is equal to marginal cost (MC).

In other words, the condition for maximum profit occurs where:
MR = MCAnother condition for profit to be maximized, because it is possible that MR=MC at a point where MC is falling, is that the marginal cost curve must be rising. Therefore, the supply curve for a competitive firm will be that part of the marginal cost curve which lies above the low point of the average cost curve. The supply curve slopes upward because marginal costs increase with the greater quantity supplied in the short run. With a competitive market, the supply curve will be a summation of the individual firms' supply curves.

Social Cost

Definition of social cost – Social cost is the total cost to society. It includes both private costs plus any external costs.

The social costs of smoking include the passive smoking that other people experience.

The social cost involved in building and running an airport can be split up into:

Private costs of airport

• Cost of constructing airport.
• Cost of paying workers to run airport

Shifts in supply

The position of a supply curve will change following a change in one or more of the underlying determinants of supply. For example, a change in costs, such as a change in labour or raw material costs, will shift the position of the supply curve.

Rising costs

If costs rise, less can be produced at any given price, and the supply curve will shift to the left.

Shifts in demand

The position of the demand curve will shift to the left or rightfollowing a change in an underlying determinant of demand.

Increases in demand are shown by a shift to the right in the demand curve. This could be caused by a number of factors, including a rise in income, a rise in the price of a substitute or a fall in the price of a complement.

Demand schedule

A shift in demand to the right means an increase in the quantity demanded at every price. For example, if drinking cola becomes more fashionable demand will increase at every price.

PRICE (£) ORIGINAL Qd NEW Qd 1.10 0 100 1.00 100 200 90 200 300 80 300 400 70 400 500 60 500 600 50 600 700 40 700 800 30 800 900

The Phillips curve

The Phillips curve shows the relationship between unemployment and inflation in an economy. Since its ‘discovery’ by British economist AW Phillips, it has become an essential tool to analyse macro-economic policy.The Phillips curve shows the relationship between unemployment and inflation in an economy. Since its ‘discovery’ by British economist AW Phillips, it has become an essential tool to analyse macro-economic policy.Phillips analysed annual wage inflation and unemploymentrates in the UK for the period 1860 – 1957, and then plotted them on a scatter diagram.   

Deadweight Loss

Deadweight loss is the inefficiency caused by, for example, a tax or monopoly pricing.  The diagram below shows a deadweight loss (labeled "gone") caused by a sales tax.  By causing a difference between the pre-tax price received by producers and the after-tax price paid by consumers, the government secures the area labeled Government Revenue.  This revenue comes at the expense of the consumer surplus and producer surplus that would have existed in the no tax equilibrium.  The "gone" triangle of deadweight loss goes to no one because those transactions are prevented by the sales tax.

This diagram is borrowed from Who Pays a Sales Tax?, which applies this concept.

Monopoly I: Multiplant monopoly

A multiplant monopoly is given in monopolistic firms that have their production divided into more than one production plant, each one having its own cost structure. Different cost stuctures give place to differentmarginal costs and hence each production plant will have to choose the individual production output level following the maximising principle. For a monopoly with two plants, we have

where x1 and x2 are the same product, but produced at different plants. This multiplant monopoly will maximise its profits when

where MR is the marginal revenue and MC is the marginal cost in each plant.

Types of Costs

A list and definition of different types of economic costs

Fixed Costs (FC). The costs which don’t vary with changing output. Fixed costs might include the cost of building a factory, insurance and legal bills. Even if your output changes or you don’t produce anything, your fixed costs stays the same. In the above example, fixed costs are always £1,000.

Variable Costs (VC). Costs which depend on the output produced. For example, if you produce more cars, you have to use more raw materials such as metal. This is a variable cost.

Semi-Variable Cost. Labour might be a semi-variable cost. If you produce more cars, you need to employ more workers; this is a variable cost. However, even if you didn’t produce any cars, you may still need some workers to look after empty factory.

SLOPE, SHORT-RUN AGGREGATE SUPPLY CURVE:

The positive slope of the short-run aggregate supply curve, reflecting the direct relation between the price level and real production, results for three primary reasons--inflexible resources, frictional and structural unemployment, and purchasing power imbalances.

The short-run aggregate supply (SRAS) curve graphically represents the direct relation between the price level and aggregate real production. A higher price level is related to more real production and a lower price level is related to less real production. That is, the business sector is inclined to offer more total goods and services for sale if the price level rises and less if the price level falls.

The key question is: Why? Why does the short-run aggregate supply curve have a positive slope? While the general reason is similar to that of market supply curves--the opportunity cost of production--three specific reasons are at work:

• Inflexible resource prices that often makes it easier to reduce aggregate real production and resource employment when the price level falls.


• The pool of natural unemployment, consisting of frictional and structural unemployment, that can be used temporarily to increase aggregate real production when the price level rises


• Imbalances in the purchasing power of resource prices that can temporarily entice resource owners to produce more or less aggregate real production than they would at full employment.

MICRO-ECONOMIC ANALYSIS OF PRODUCTION

5.1 Production Function in the Short Run
5.2 Basics of Returns to Scale
5.3 Basics of Cost Functions

5.3.1 Total costs and unit costs
5.3.2 Cost curves in the short run in the fishery industry

5.4 Average Cost Curve in the Long Run

5.4.1 Cost curves in the long run for actual plants

5.5 Micro-economics Applied to a Whole Fishery

5.5.1 Mathematical models for evaluation of the fish resources

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The production function appears in the micro-economic analysis as one of the two determining factors of the economic sustainability of the firm. A businessman aiming at a state of equilibrium in his business, trying to maximize his profits in the short run, must simultaneously consider the technological characteristics of his installations and possible ways of using them to produce. The cost of the production process must also be considered.

The first factor is formally expressed through a production function. In any given country, a specific production technique exists, based on existing installations in the various productive sectors, production processes, different forms of organization, business management and division of labour. This situation can be functionally represented by a relationship that links the value added during production, or the domestic product, to the quantities utilized from the different productive factors. These concepts constitute the aggregate production function for each sector, e.g., the aggregate function of frozen fish plants.

Monopoly power

A pure monopoly is defined as a single supplier. While there only a few cases of pure monopoly, monopoly ‘power’ is much more widespread, and can exist even when there is more than one supplier – such in markets with only two firms, called a duopoly, and a few firms, an oligopoly.

According to the 1998 Competition Act, abuse of dominant power means that a firm can 'behave independently of competitive pressures'.  See Competition Act.

For the purpose of controlling mergers, the UK regulators consider that if two firms combine to create a market share of 25% or more of a specific market, the merger may be ‘referred’ to the Competition Commission, and may be prohibited.

Formation of monopolies

Monopolies are formed under certain conditions, including:

1. When a firm has exclusive ownership or use of a scarce resource, such as British Telecom who owns the telephone cabling running into the majority of UK homes and businesses.
2. When governments grant a firm monopoly status, such as the Post Office.
3. When firms have patents or copyright giving them exclusive rights to sell a product or protect their intellectual property, such as Microsoft’s ‘Windows’ brand name and software contents are protected from unauthorised use.
4. When firms merge to given them a dominant position in a market.

Maintaining monopoly power - barriers to entry

Monopoly power can be maintained by barriers to entry, including:

Economies of large scale production

If the costs of production fall as the scale of the business increases and output is produced in greater volume, existing firms will be larger and have a cost advantage over potential entrants – this deters new entrants.

Predatory pricing

This involves dropping price very low in a ‘demonstration’ of power and to put pressure on existing or potential rivals.

Law Of Diminishing Marginal Utility

DEFINITION OF 'LAW OF DIMINISHING MARGINAL UTILITY'

A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

INVESTOPEDIA EXPLAINS 'LAW OF DIMINISHING MARGINAL UTILITY'

This is the premise on which buffet-style restaurants operate. They entice you with "all you can eat," all the while knowing each additional plate of food provides less utility than the one before. And despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original.

For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food. Since you're not as hungry, your enjoyment rates at a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three. If you kept eating, you would eventually reach a point at which your eating makes you sick, providing dissatisfaction, or 'dis-utility'.

long run costs of production

Introduction

The time periods that we use in Economics can sometimes appear somewhat arbitrary – they help to provide a framework within which we can analyse the behaviour of businesses in different markets and industries, but the length of time that constitutes the short run clearly varies across industries and the reality is that most businesses can vary the amount of capital input in the short run by leasing items of machinery and renting additional commercial property and factory space if it is available.

The key point about the long run is that all factors of production are assumed to be variable, in other words a business can vary all of its inputs and change the whole scale of production. How a firm’s output responds to a change in factor inputs is called returns to scale. The hypothetical returns for a business varying the scale of production is shown in the table below

Labour Input	Plant 1	Plant 2	Plant 3	Plant 4
10	40	100	130	150
20	100	160	180	210
30	130	180	240	250
40	150	200	255	275
50	160	210	270	290
Capital Input	10	20	30	40

In the example shown when the business increases the scale of production from Plant 1 (with 10 units of labour and 10 units of capital) to Plant 2 (a doubling of the inputs used), total output quadruples. This shows increasing returns to scale leading to a fall in the average total cost of production. A further increase in scale to Plant 3 demonstrates constant returns to scale where both inputs and output have increased by 50% and a further expansion of scale to Plant 4 illustrates decreasing returns to scale where inputs have grown by 33% but output has grown by just 15%. When a firm experiences decreasing returns to scale, then average total cost will rise – in other words diseconomies of scale exist.

Traditional Theory of Cost

IntroductionCost is the most important factor which influence the supply of commodities. Since highest cost reduces the profits of the producer it is very important factor consider very seriously by the producer.

The theory of cost is very important inEconomics. Now, the theory has two versions like traditional version and modern version. Here the hub briefly explaining the traditional theory of cost.

Concept of costs

When a producer want to produce commodities, he should contribute the factors of production. Then only he can produce the commodity. Further he required to spend many other expenses like taxes, duties etc. So, the cost refers to the expenditure incurred by a firm to produce goods and services.

Types of costs

On the basis of the nature of the expenditure costs can be classified in to many. Some of them are described below.

Money costs / explicit costs : simply money costs refers to the total money expenditure incurred by a firm due to its production activities. Wages to labors, salaries to staffs, expenses to purchase raw materials, rent etc. are the examples for money cost. It is also called as explicit costs.