Answer to Question #287437 in Microeconomics for the uneducated

Question

Explain why it is not possible for a monopoly firm to maximize its profits by charging a price in the price region where demand is inelastic, even though there are no direct substitutes for its product. Also explain how a monopoly will be able to charge a higher price than a firm producing the good under perfect, oligopolistic, or monopolistic competition

Answer 1

The monopolist cannot charge the highest price possible; it will maximize profit where TR minus TC is the greatest. This is dependent on both the amount and the price of the product. The monopolist can set the price at which consumers will pay for that level of output. As a result, the price is in line with the demand curve. Monopoly can result in losses; however, the monopolist will not operate at a loss indefinitely. Monopolies will produce less and charge more than pure competitive companies selling in the same market. Unless the government supervises the monopoly and prohibits monopoly profits, income distribution is more uneven than it would be in a more competitive market.

Monopolies are defined by a lack of feasible substitute goods and a lack of economic rivalry in the production of the good or service. As a result, the price of a good is controlled by a single producer — in other words, the producer is a price maker who may set the price by deciding how much of a good to create. The majority of public utility firms are monopolies. In the case of electricity distribution, for example, the cost of laying power lines is so high that having more than one provider is inefficient. Because there are no good alternatives for electricity supply, consumers are limited in their choices. Most consumers would likely continue to purchase power if the electricity distributor raised their pricing, hence the seller is a price maker.