Monday, December 3, 2012

Topic 15: What is a Monopoly?

After watching the video "What is a Monopoly," respond to the questions below:
1. What are the three main characteristics that make a firm a monopoly?
2. How does a monopoly firm decide how much to produce and what price to charge?
3. What are the costs and benefits of monopoly to the monopolist firm and to society?
4. In the video, one commentator mentions some of the problems with monopolies, but he says that those aren't what economists are concerned with. What are the problems he is referring to? If economists are not concerned with those problems, what are they concerned about? Do you agree with their concerns?
5. Monopolies are often looked at as bad. Can they also be good? Under what circumstances could a monopoly be a good thing?
6. Given that in the long run monopolists spend all of their surplus in maintaining their monopoly position, do you think it is worth it to try to attain a monopoly? Why or why not?
  1. The three main characteristics that main a firm a monopoly are that there is only one firm in the market, the product is unique and there are no substitutes for it, and there are barriers to entry for the market.
  2. Monopoly decides how much to produce by choosing the quantity where marginal cost equals to marginal revenue, and it decides how to charge its product by charging the highest price that people are willing to pay on the market demand curve for the good.
  3. The costs of monopolies are that a deadweight loss arises when the monopoly is not completely efficient. The benefits of monopolies are that monopolies encourage innovation and research (since there are patents), and society can enjoy cheaper prices since only one firm supplies a product, and a larger quantity supplied means that average total cost is spread out, lowering the costs.
  4. The problem that the economists are not concerned with is the transferring of income from consumers to monopolists, and that in competitive markets, prices will be lower and quantity produced will be higher. The economists are concerned with the inefficiency and efficiency of monopolies, and whether or not deadweight lost arises. If talking about fairness, then I do not agree with the economist's concern about efficiency. However, if talking about productivity and the use of resources, then yes, I do agree with the economists view for efficient monopolies.
  5. Monopolies can be considered good because if the average cost is decreasing, then there are advantages to large scale manufacturing and production.
  6. If, in the long run, a monopoly spends all of its surplus to maintain its position, then it is not worth it to attain a monopoly because it would mean that a lot of resources that could be used for other things would be wasted and not properly distributed between the consumers and the producers, which is a huge opportunity cost.

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