Economics by Dasgupta Partha;

Author:Dasgupta, Partha;
Language: eng
Format: epub
Publisher: Oxford University Press, UK
Published: 2007-09-14T16:00:00+00:00

Monopoly

The second reason is that in some industries there is a single producer (monopoly) or at best only a few producers (oligopoly). Firms in an ideal market don’t have anything left over after every production input has been paid for (wages, salaries, raw materials, repair and maintenance, charges imputed to machinery and equipment, interest payments on loans, and so on). Because a monopolist doesn’t face competition from other firms, it’s able to charge a price higher than PE (Figure 8) and enjoy a profit.

Monopolists have a bad press in consequence. However, we need monopolists because profits from sales are the incentives firms must have if they are to spend resources in research and development (R&D), so as to create new products and invent cheaper ways of producing old products (which is a good thing). Moreover, monopolists try to maintain their leading position by engaging in R&D, thereby forestalling entry by rivals (a not-so-good thing). Unless they are curbed, though, monopolists would wish to more than just recoup those R&D expenses. In rich countries anti-trust laws have been legislated so as to prevent firms from doing that.

Monopolies are a necessary evil for another reason. There are commodities whose cost of production per unit produced declines with output. Economists call this phenomenon economies of scale.

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