Microeconomics Assignment

Posted on: 28th May 2023

Question

Using supply and demand curves explain where appropriate :

a) How does a monopoly maximizes its profits 15%

b) What is price discrimination in context of monopolies? 5%

c) Inwhatsituationscanamonopolybejustified?5%

d) What can government do when faced with monopoly structures in key industries. Use

real life examples to support your answer. 5%

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Solution

Microeconomics Assignment

There is no substitute in a monopolistic market, so there is absolute product differentiation. Because of the absence of competition, the product in the market maximizes profit. Given that there is no competition in the monopolistic market, it clearly controls the price and quantity demand. Although a monopoly can charge whatever price it wants for a product or service, that price is still constrained by market demand. Since monopoly is about a firm has only one product in the market, the demand curve is the same as market demand thus, it maintains profit in the market. Monopolists maximize profits by selecting output and price at which the marginal cost is as close to the marginal revenue as possible (Wang, 2021,1254). The company always maximizes profits by producing the number of products where marginal income equals marginal cost. Where marginal income is equivalent to marginal cost. This indicates that the product's price is greater than the normal variable cost, and the marginal rate rises at a profit, maximizing the output. It is clear that in the market where the firm is monopolized, it maximizes the total profit by ensuring that it equates marginal cost to that of revenue to make a significant profit. Therefore, a monopoly maximizes the market profit if marginal revenue surpasses the marginal cost, thus producing positive returns.

Based on monopoly, price discernment is a practice of charging different prices for the same products in the market. In most cases, the monopoly in the market always has more control over suppliers than regular sellers, indicating that they can influence suppliers selling prices (Indeed Editorial, 2022). Price discrimination often occurs when a company in the market charges a different price to distinct customer groups for a reason that is unrelated to supplier costs. Indeed, the concept of price discrimination departs from the commonly held belief that there is a single profit-maximizing price for the same services or products (Nitisha, 2015). Given that there is a single seller of a product in a monopoly, it is obvious that they have most of the time control over demand, supply decisions, and pricing, which causes them to set a price in such a way that it earns the maximum price. In most cases, the monopoly organization in the market practices price discrimination because they charge dissimilar prices for the same product but for different consumers. Monopolist uses this type of price in the market to exploit the consumers because of having flexible pricing power. Because there is no substitute, there is absolute product differentiation in a monopolistic market. Because of the lack of competition, the product in the market maximizes its profit. Given the importance of this kind of pricing to the organization, many firms have embraced it as a way of making a profit in the market, thus becoming widespread in today's market. Price discrimination strategy is not only to ensure that monopoly firms gain profit but also to earn revenue and stabilize the business. Apart from helping the organization register positive outcomes in the market in terms of profits, it also facilitates the firm's expansion plans, thus stabilizing the business.

There are different ways in which the organization's monopoly can be justified. For instance, there are many firms in the competitive market, none of which is large in size. But this is the opposite of a monopolistic market, where one largest firm controls the market. It supplies all of the market's supply because it is the sole company operating there. More importantly, a monopoly is justified in the market when only one firm is operating in the market (CliffsNotes, 2020). Another thing that justifies a monopoly is when there is a massive barrier for new entrants to enter the market. Also, the lack of a close substitute for the available product in the market justified that the market is a monopoly. This indicates that the lack of close substitutes in the market makes the monopoly product not face any competition. However, not all monopolies are justified by absence of competition in the market, but others are arisen naturally, more so in the market where there are large economies of scale. As a result, it is clear that lack of competition, rising prices, and declining quality are some significant factors that justify market monopoly.

When the government is faced with monopoly structures in key industries, it can do different things such as limiting price increases, mergers, and nationalism regulation. It is clear that the monopoly of the key industries in the country reduces the economic wealth of society thus, using the mentioned strategies, the government regulates monopolies with the objective of benefiting the societies (Megginson and Mueller, 2022, 115). More importantly, the government can use the regulations to prevent excess prices that could have led to declining consumer buying power (Pettinger, 2019, n.p). Also, with the regulation, the organization can offer quality services because it ensures that the firm meets minimum standards of services. It also helps promote competition because no company will see its product as superior to others. For instance, the United States government has regulated monopoly by owning United States Postal Services, which is the same case in Europe, where many governments own utilities such as electricity and water. 

References

CliffsNotes, C.N. (2020). Economics. Conditions for Monopoly. Available at: https://www.cliffsnotes.com/study-guides/economics/monopoly/conditions-for-monopoly [Accessed July 9, 2022].

Indeed Editorial. (2022). Types and examples of price discrimination in a Monopoly. Indeed Career Guide. Available at: https://ca.indeed.com/career-advice/career-development/price-discrimination-in

Megginson, W.L. and Mueller, P.C., 2022. Natural Monopoly Privatization: Minimizing Regulatory Trade-Offs Between Rent Extraction and Innovation. Academy of Management Perspectives, 36(1), pp.111-124.

Nitisha, N., 2015. Price discrimination under monopoly: Types, degrees and other details. Economics Discussion. Available at: https://www.economicsdiscussion.net/monopoly/price-discrimination-under-monopoly-types-degrees-and-other-details/3741 [Accessed July 9, 2022].

Pettinger, T., 2019. Regulation of monopoly. Economics Help. Available at: https://www.economicshelp.org/microessays/markets/regulation-monopoly/ [Accessed July 9, 2022].

Wang, C., 2021. Monopoly with corporate social responsibility, product differentiation, and environmental R&D: Implications for economic, environmental, and social sustainability. Journal of Cleaner Production, 287, p.1254.

Wolinsky, A., 2016. Brand names and price discrimination. The Journal of Industrial Economics, pp.255-268.

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