Many people who have not taken an Economics course believe that the reason we are concerned about monopoly markets is that monopolists always make "excessive" profit. Using the outcomes in a perfectly competitive market, discuss that the issue is not profit, but inefficiency that creates market failure from monopoly. Carefully and fully explain your responses.
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In a perfectly competitive market, there are many buyers and sellers who have no control over the price of the product. The market is characterized by free entry and exit, perfect information, and homogeneous products. In this market structure, no single firm has Show more…
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The late Nobel Laureate economist George Stigler wrote that the "purely 'economic' case against monopoly is that it reduces aggregate economic welfare $\ldots .$ When the monopolist raises prices above the competitive level in order to reap his monopoly profits, customers buy less of the product, less is produced, and society as a whole is worse off." a. Draw a graph similar to Figure 15.5 on page $520 .$ In your graph indicate the price that is at what Stigler refers to as "the competitive level." Compare this price to the price at which the firm earns "monopoly profits." b. Use your graph to explain why society is worse off when a monopolist charges a price that earns monopoly profits rather than when price is set at the "competitive level:
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Unlike the perfect competitor, we see that a monopolist gets to choose a price and quantity. We also see that the monopolist has a tradeoff between price and quantity, that is, the higher price they charge, the less quantity they will produce, and vice versa. For this discussion, your task is to: 1.) Describe a practical example that shows why monopolists face this tradeoff. 2.) If you deal with a monopoly in your life, what actions may you take if they raise prices too much? What impact does this have on the monopoly?
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