Essay Example on The concept of monopoly power and the way abuse of monopoly power

The two curves will always intersect when AC is minimum since at the point where MC is greater than AC AC will start to rise A monopolist will seek to maximize their profits just like any other entrepreneur This happens if production stops at the point where the MC is equal to MR This is because at any point beyond that MC will be greater than MR Meaning that the production of these units will not be profitable and there will be incentive not to produce them On the other hand at any point prior to that MR is greater than MC so there will be potential profits and incentive to produce more This is true for any other firm too however because of its power and the huge demand it has to face the monopolist will set the price higher than its MR Whereas a competitive market price would have been set at P MR The above will result in allocative inefficiency and welfare loss as there will be a fall in consumer surplus which is the difference between WTP and market price Additionally there will be a loss in producer surplus which is the difference between the money a producer receives total revenue and the marginal costs

This happens because there are units that could have potentially been exchanged in the market but are not produced and consequently keep prices higher This is marked by the triangle on the graph also known as Deadweight loss and it represents all the additional units that could have been potentially produced and sold since WTP MC Following that they can increase the price and maximize profits while keeping a low quantity resulting in a Pareto inefficient market which is by definition a type of market failure since either the supplier or the consumers or in fact both parties can be made better off without the other being made worse off H 2016 One may ask why would a monopolist incur a loss on itself by reducing PS the answer is that PS is not equal to profit since there are also fixed costs which are not accounted for in PS