Evils and Wastage of Monopoly

Evils and Wastage of Monopoly - produced at point e 1 which...

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Evils and Wastage of Monopoly Monopoly market is restrictive and hence considered as an evil form of market. Monopoly is also a source of wastage. It underutilizes productive capacity and reduces Consumer’s Surplus. Underutilization of capacity may cause some workers to remain unemployed. These and other shortcomings can be analyzed and explained. We find both competitive and monopoly equilibrium positions marketed by point e 1 and e 2 respectively. A competitive firm produces output Q 1 and sells at price P 1 . A monopolist produces smaller output Q 2 (Q 2 <Q 1 ) and charges higher price P 2 (P 2 >P 1 ). Competition allows only normal profits to a firm as part of the average cost of production. A monopolist earns extra monopoly profits of the size CSRP 2 . Under competition output is
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Unformatted text preview: produced at point e 1 which is the lowest point on the average cost line. Therefore competition makes fuller utilization of the productive capacity. Under monopoly output is produced at point S which is on the falling phase of AC. This shows underutilization of the productive capacity. Finally, the size of the Consumer’s Surplus under competition is as large as De 1 P 1 while that under monopoly is only DRP 2 . Hence under monopoly there is higher price, lower output, underutilization of productive capacity or wastage of resources and reduction in Consumer’s Surplus. Such evils or wastage under monopoly are also present more or less in every other imperfect market with a lower degree of competition....
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This note was uploaded on 11/26/2011 for the course ECONOMIC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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