In a market with free entry and exit, profits are driven to zero in the long run in this long-run equilibrium, all firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at thisprice.Changes in demand have different effects over different time horizons. In the short run, an increase in demand raises price and leads to profits, and a decrease in demand lowers prices and leads to losses. But if firms can freely enter and exit the market, then in the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium.
Monopoly11/02/2014°Key wordsMonopolyoA firm that is the sole seller of a product without close substitutesNatural monopolyoA monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firmsA monopolists marginal revenue is always less than the price of its goodThe monopolists profit maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curveIn competitive markets, price equals marginal cost. In monopolized markets, price exceeds marginal costThe socially efficient quantity is found where the demand curve and the marginal-cost curve intersectThe monopolist produces less than the socially efficient quantity of outputsPrice discriminationoThe business practice of selling the same good at different prices to different consumers°°SummaryA monopoly is a firm that is the sole owner in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or hen a single firm can supply the entire market at a lower cost than many firms could.Because a monopoly is the sole producer in its market, it faces a downward-sloping demand curve for its product. When a monopoly increases production by one unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopolys marginal revenue is always below the price of its good
Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. The monopoly then chooses the price at which that quantity isdemanded. Unlike a competitive firm, a monopolys firm price exceeds its marginal revenue, so its price exceeds marginal cost.A monopolists profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. That is,when the monopoly charges a price above marginal cost, some consumers who value the good more than its cost of production do not buy it. As a result, monopoly causes deadweight losses similar to those caused by taxes.