It creates a substitute for your house phone, causing the traditional telephone companies to lose their monopoly position. Monopoly demand is the industry or market demand and is therefore downward sloping. Price will exceed marginal revenue because the monopolist must lower price to boost sales and cannot price discriminate in most cases. The added revenue will be the price of the last unit less the sum of the price cuts which must be taken on all prior units of output. The marginal revenue curve is below the demand curve.
The monopolist cannot charge the highest price possible, it will maximize profit where TR minus TC is the greatest. This depends on quantity sold as well as on price.
The monopolist can charge the price that consumers will pay for that output level. Therefore, the price is on the demand curve. In monopoly, the production is made at a level which is less than minimum average cost due to which less quantity is produced and higher price is charged. This phenomenon can be better explained by comparing monopoly with perfect competition. The following graph will help you to understand the productive inefficiency in monopoly.
The average revenue curve for a monopoly is AR 1 and for the perfect competition the average revenue curve is AR 2. Whereas AR 2 of the perfectly competitive firm is equal to AC, the equilibrium point for it is at E 2. It is producing OQ 2 quantity and is charging the OP 2 price, which is lower than as charged by a monopoly firm.
The monopoly firm creates entrance barriers for other firms to enter in industry and do business. This is very harmful for the economy and for the consumer too. As it forms the situation in an economy where no substitutes are available for the consumer at competitive prices.
It the usual practice of monopoly firm to earn supernormal profit in long run, which is again a disadvantage to the economy. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. The price P reflects demand, and as such is a measure of how much buyers value the good, while the marginal cost MC is a measure of what additional units of output cost society to produce.
Following this rule assures allocative efficiency. However, in the case of monopoly, at the profit-maximizing level of output, price is always greater than marginal cost.
You can see this in Figure 1. Figure 1. The Allocative Inefficiency of Monopoly. A monopoly will produce less output and sell at a higher price to maximize profit at Qm and Pm. Thus, consumers will suffer from a monopoly because it will sell a lower quantity in the market, at a higher price, than would have been the case in a perfectly competitive market.
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