Answer to Question #274120 in Microeconomics for Monelev

Question

AT&T Inc.. the large U.S. phone company and the one-time monopoly, left the pay-phone business because people were switching to wireless phones (Crayton Harrison, "AT&T to Disconnect Pay Phone Business After 129 Years," http://www. Bloomberg.com, December 3, 2007). The number of wireless subscribers quadrupled in the past decade: 80% of U.S. phone users now have mobile phones. Consequently, the number of pay phones fell from 2.6 million at the peak in 1998 to 1 million in 2006. (But where will Clark Kent go to change into Super man now?) Use graphs to explain why a monopoly exits in a market when its demand curve shifts to the left.

Answer 1

A shift of the demand curve to the left means that the demand of the product being provided has dropped due to change of a factor or factors. This means that less of the good is demanded at every price.

As the demand curve moves to the left, it can reach a point where it is below the average total cost curve. This situation is shown on the graph where the demand curve shifts from D1 to D2. At this point, the price of the commodity is lower than the average total cost and the company no longer makes profit. Instead, they are making loses on the commodities sold and this will cause the monopoly to exit the market.