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Microeconomics - Essay Example

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Microeconomics 08/26/2012 Microeconomics In 2007, the potato chip industry in the Northwest was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return and were competing in a monopolistically competitive market structure…
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Microeconomics
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Microeconomics

Now, there is only a single supplier of potato chip all across the region (Brigham, 1976). As all firms decided to merge together to create a single monopoly, now there will be barriers to entry in the industry as no further firms can enter the market easily and threaten the existence of existing firms. The firm is now protected against any other foreign threat as no other firm can enter the market to compete with it. This monopoly is owned by a single firm and so the business enjoys the benefit of having the entire market share to itself without any pressure or constraints. However, this monopoly is not a natural monopoly and so it can charge its customers with whatever price suits it and gain higher profits. A monopoly also produces goods and services by producing required quantity at a price where marginal cost equals marginal revenue just like any other market structure. But, it can also choose to set a price at which quantity is demanded where price might exceed the marginal cost (Case, 1996). Monopoly is highly beneficial to society and consumers as well. Large firms usually attain the benefit of gaining from economies of scale. Economies of scale is increase in efficiency as the number of goods produced by a firm increases. Due to economies of scale, the Average cost curve goes downwards. If the fall in Average cost curve is very large so a monopolist can charge its consumers a lower price and generate a higher output than the monopolistic competition of the market. This way, monopolist maximizes the profits. Marginal cost becomes equal to marginal revenue at this point. This means that now the consumers can enjoy potato chips at a lower price than it was when the market was monopolistic due to huge producer surplus. The society gains as well (Allen, 2005). As this monopoly is privately owned, and not a government regulated natural monopoly, government does not have any say here. But it can produce revenues for the entire economy in form of more and more exports. This single firm can take advantage of economies of scale from its home economy and maintain a cost advantage through which it can exploit the international market and can sell at a relatively cheap rate abroad. Governments do gain when the economies prosper as now government receives more money in form of taxes which it can utilize in infrastructure and other welfare activities (Allen, 2005). However, the change from monopolistic market structure to monopoly does come with a lot of changes in profits and revenues. In a monopolistic competition, the industry comprise of a huge number of firms, each one of those have relatively small size as compared to total market. That is why; no firm can affect the overall market price because of its small size. But, in a monopolistic structure, firms can differentiate their output by having some control over price (Allen, 2005). The short-run equilibrium of monopolistic market is achieved by setting the price where marginal cost is equal to marginal revenue. The profits of a firm arise by entrance of similar products by different firms in the market; where every firm competes for only a percentage of the total demand. Whenever a new firm enters the market, the demand curve shifts downwards due to which profits remain no more (Allen, 2005). Now due to large entrants of firms in the market, the individual demand curve shifts to the left. Here, the zero profit condition arises where ... Read More
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