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Explain, with the aid of a diagram, the long run equilibrium position for a monopoly firm which seeks to maximise profits - Leaving Cert Economics - Question 2 - 2008
Question 2
Explain, with the aid of a diagram, the long run equilibrium position for a monopoly firm which seeks to maximise profits. (c) (i) State and explain three barrie... show full transcript
Worked Solution & Example Answer:Explain, with the aid of a diagram, the long run equilibrium position for a monopoly firm which seeks to maximise profits - Leaving Cert Economics - Question 2 - 2008
Step 1
Explain, with the aid of a diagram, the long run equilibrium position for a monopoly firm which seeks to maximise profits.
Answer
To illustrate the long run equilibrium position for a monopoly firm, we can consider the following:
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Diagram Explanation: The diagram consists of demand (D), marginal revenue (MR), marginal cost (MC), and average cost (AC). The equilibrium is established at point E, where MC intersects MR. The monopolist sets output at Q1 and determines price at P1.
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Price Charge & Output Produced: At this equilibrium, the firm produces the output Q1 and sells it at price P1 in the market.
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Cost of Production: The cost associated with producing this output is illustrated at point C, where AC is minimized.
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Super Normal Profits: The firm earns super normal profits, represented by the area above AC until the price P1, since AR > AC. This profit is sustainable due to existing barriers to entry that prevent competitors from entering the market.
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Waste of Scarce Resources: The firm produces output at a level that does not minimize the average cost curve, indicating a waste of resources in the long run.
Step 2
State and explain three barriers to entry facing entrants to a monopoly market.
Answer
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Legal/Statutory Monopoly: Legal protections may prevent new firms from entering the market, such as licensing requirements or patents that grant exclusive rights to existing firms.
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Ownership of a Patent/Copyright: If a monopoly has a patent on a specific product or technology, no new firm can compete with it until the patent expires. This gives the monopoly a significant competitive advantage.
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Large Capital Investment: The significant costs associated with starting a business in this market can deter potential competitors. If one firm's operational scale exceeds the available market size, new entrants may find it difficult to sustain profitability.
Step 3
Explain how deregulation could affect: (i) Consumers of the good/service;
Answer
Deregulation leads to increased competition, which usually results in lower prices for consumers.
- Increased efficiency through competition can improve the quality and variety of services available, as firms strive to attract consumers.
Step 4
(ii) Employees in the industry;
Answer
Deregulation may result in job losses due to increased competition, forcing some firms out of business.
- However, it can also create new job opportunities with new entrants into the market, leading to a dynamic labor environment with potentially better conditions.
Step 5