![]() ![]() If a second firm attempts to enter the market at a smaller size, say by producing a quantity of 4,000 planes, then its average costs will be higher than the existing firm, and it will be unable to compete. In this situation, the market has room for only one producer. Now consider the market demand curve in the diagram, which intersects the long-run average cost (LRAC) curve at an output level of 6,000 planes per year and at a price P 1, which is higher than P 0. It shows economies of scale up to an output of 8,000 planes per year and a price of P 0, then constant returns to scale from 8,000 to 20,000 planes per year, and diseconomies of scale at a quantity of production greater than 20,000 planes per year. Figure 1 presents a long-run average cost curve for the airplane manufacturing industry. (This theme was introduced in Cost and Industry Structure). Natural MonopolyĮconomies of scale can combine with the size of the market to limit competition. The other is legal monopoly, where laws prohibit (or severely limit) competition. One is natural monopoly, where the barriers to entry are something other than legal prohibition. There are two types of monopoly, based on the types of barriers to entry they exploit. Thus, in markets with significant barriers to entry, it is not true that abnormally high profits will attract new firms, and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run. Barriers may block entry even if the firm or firms currently in the market are earning profits. ![]() In other cases, they may limit competition to a few firms. In some cases, barriers to entry may lead to monopoly. Once the rights to all of them have been purchased, no new competitors can enter the market. For example, there are a finite number of radio frequencies available for broadcasting. ![]() Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. These profits should attract vigorous competition as described in Perfect Competition, and yet, because of one particular characteristic of monopoly, they do not. Analyze the importance of trademarks and patents in promoting innovationīecause of the lack of competition, monopolies tend to earn significant economic profits.Explain how economies of scale and the control of natural resources led to the necessary formation of legal monopolies.Distinguish between a natural monopoly and a legal monopoly.The higher the number of brands and types of products on the market, the easier it will be for buyers to find a product that they really like. I believe that buyers don't just decide based on prices, they decide on their tastes and likes as well. I purchase a higher costing mouthwash, not because I think it works better, but because I like the flavor of it the best out of all the others. I think monopolistic competition is great, not just for the competitive prices, but because it caters to different tastes, such as with the mouthwash example. It's definitely good for us, because we get better and better products, but it's not fun for the companies competing at all. When there are more products but the demand is the same, each brand will sell less and will profit less. I mean, there is no cost of entering a monopolistically competitive market, so new companies enter all the time. The reason is because their sales and profits keep going down due to the intense competition. I thought I'd pitch in and review what I learned at the same time.Ĭompanies that manufacture products in monopolistic competition have to keep improving their products and making them a bit more attractive. I have to take an econ exam that includes this concept in a few days. So it kind of reaches an equilibrium and balances itself out. If the firms are at a loss, then they're going to start leaving the market, and that will reduce the number of those products on the shelves. If there are so many firms that they stop making profit, new ones won't enter. 3 hours Yea, new firms will keep entering the market, but only if the firms that are already in it are making a profit. ![]()
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