microeconomics
In your responses, comment on at least two posts from your peers by providing examples from the news of monopolies and firms in monopolistic competition markets. Compare and contrast the two types of markets.
The first discussion to reply to one page response
The fundamental market inefficiency derived from monopolies is that monopolies produce less than the socially efficient quantity of output. (Mankiw, 2021) Since a monopoly sets the price of goods beyond marginal cost, not all potential buyers who would otherwise buy it, will pay the higher cost to purchase the good. This means that the output of a monopoly is lower than the socially efficient level of output. This is known as a deadweight loss and it occurs when the supply and demand are out of equilibrium. Many individuals think that the profits of a monopoly are the issue and create inefficiency, however, the inefficiency fundamentally stems from the inefficient level of output that is below the level that maximizes total surplus. (Mankiw, 2021) Examples of monopoly firms include cable television and tap water.
That said, the inefficiency of a monopoly can also be examined in context of the monopolists price. From the required text, Producing a quantity that is inefficiently low is equivalent to charging a price that is inefficiently high. (Mankiw, pg. 15-3a, 2021) When a monopoly firm charges a price that exceeds the marginal cost, some would-be buyers value the item at more than its marginal cost, however, they also value it less than the monopoly firms price, and as a result, they do not purchase the good. Because the value they place on the good exceeds the firms cost of providing it to them, this result is inefficient. Thus, monopoly pricing prevents some mutually beneficial trades from taking place. (Mankiw, pg. 15-3a, 2021)
One inefficiency stemming from monopolistic competitive firms is too many or too few firms in the market creating positive and negative externalities. For example, product-variety externality occurs when consumers receive additional consumer surplus when a new product is introduced to the market. This is an example of a positive externality on consumers. Another example is known as the business-stealing externality. When other firms in the market lose buyers and revenue when a new competitor enters the market, a negative externality is levied on existing firms in that market. (Mankiw, 2021) A monopolistic competitive market also has the same efficiency when it comes to pricing that a straight monopolistic firm has. A monopolistic competitive firm has its price over marginal cost. This is difficult to regulate because the products are so common in the market that the administrative cost is overwhelming to regulating agencies. Examples of monopolistic competitive firms include novels and movies.
In the short run, both the monopoly firms and monopolistic competitive firm enjoy high economic profit. This is because both types of firms maximize profit by producing the quantity at which marginal revenue is equal to marginal cost, and then they utilize the demand curve to determine the price for which they can sell that quantity of output. (Mankiw, 2021) Both types of firms have downward-sloping demand curves, as opposed to the horizontal demand curve of perfectly competitive firms.
The long run is where the profits of monopolistic firms differ from monopolistic competitive firms. Unlike a monopoly which has barriers to entry allowing the monopoly to remain the only seller in the market, monopolistic competitive firms do not have the same barriers to entry and therefore allow for free entry and exit of the market. The short run profits of monopolistic competitive firms encourage the entry of new similar firms to the market over the long run. As a result, profits in the long run for monopolistic competitive firms fall as additional firms enter the market. (Mankiw, 2021)
References
Mankiw, N.G. (2020, January 1). Principles of Economics, 9th Edition, Chapter 13-14. Retrieved from https://ng.cengage.com/.
The second discussion to reply to one page response
In my simulation I was most profitable when used price discrimination and my marginal revenue was equal to my marginal cost MR=MC (Mankiw, 2021). I was able to sell the most product with price discrimination because I could sell the product at a lower cost in one market where the demand for the product was at a lower price. I could also sell it for more profit in the other market where demand was at a higher price. This price discrimination meant I could target different markets with different values of my product. I was able to maximize my profit with this strategy.
Explain which types of market inefficiencies derive from monopolies. Use examples from the textbook to support your claims.
Monopolies “fail to maximize total economic well-being.” (Mankiw, 2021) This happens because a monopoly is a price maker not a price taker as in a competitive firm. A monopoly prices the product above the marginal cost. This means that some consumers will not buy the product because they do not value the product at this price. They may value it above the marginal cost but not at the price the company sells it at. This is consider “dead weight” (Mankiw, 2021) because the quantity sold by the firm is below the “social optimum” in the market.
Describe the types of inefficiencies that derive from monopolistic competition. Use examples from the textbook to support your claims.
Monopolistic competition firms also have the “dead weight” (Mankiw, 2021) inefficiency as seen in monopoly firms. This means they are pricing their product above marginal cost, this means they produce less than is efficient for market efficiency. The price deters consumers who may value the product above marginal cost but now a the higher price the firm prices it at (Mankiw, 2021). Another inefficiency of monopolistic competition is the entry and exit of firms. Firms will enter when the price is high and exit when the price is low. When a new firm enters the market is it is a negative on other firms by offering new products that could steal their business and it adds a positive to consumers by adding new variety in product (Mankiw, 2021). This can cause a market to have either to many or to little products.
How are monopolies and monopolistic competitive firms profitable? Use examples from the textbook to support your analysis.
Monopolies are profitable because they can control the market for their product. The do not have any competition so they are price makers and can price their products above marginal cost and price is above average total cost (Mankiw, 2021). The monopoly reaches max quantity when marginal revenue equals marginal cost that means “the monopolists profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curve” (Mankiw, 2021). They are profitable because the firm is selling the highest quantity at the highest revenue with the lowest cost
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