question archive Discuss the economic effects of monopoly

Discuss the economic effects of monopoly

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Discuss the economic effects of monopoly. Be sure to include the following:

A) Monopoly price compared to the price of a competitive firm

B) Efficiency of resource allocation

B) Monopoly and its impact on large-scale production and unit cost of production

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A monopoly is a market structure with the following features:

  • A single seller and many consumers.
  • The firm is a price maker with the ability to set and maintain prices in the market.
  • The barriers to potential entrants such as substantial initial capital or unfavorable government policies.
  • The market has inefficiencies such as consumer exploitation through highly-priced and inferior goods.

The prices of goods and services are higher than those in the perfect market due to lack of competition. A monopoly sets prices above the marginal costs leading to excess profits. Sources of monopoly power include legal barriers, colossal investment requirements, and high returns to scale due to large scale production. A monopoly situation allows a firm to produce large quantities of goods and services, reaping the benefits of economies of scale and reduced costs per unit of production. However, monopolies lead to inefficient allocation of various resources causing market failure. Monopolies extort customers by setting prices for products above the marginal cost to maximize profits. The quality of the goods is also low due to the lack of competition in the market.