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ARE BUSINESSES EFFICIENT?
In lesson 8/9b we learned that in the
long run purely competitive firms are both allocatively and
productively efficient. They maximize society's satisfacton.
In lesson 10a we learned how to find the quantity produced
by monopolies. Here in lesson 10b we will learn if that
quantity that we get, the profit maximiing quantity, is the
efficient quantity that we want. Are monopolies efficient?
Are businesses efficient?
In lesson 8/9b we also learned that
if purely competitive firms have short run profits, then in
the long run new firms will enter. This will increase the
supply of the product because if the number of producers
increases then supply increases (lesson 3b). When supply
increases it causes the price to drop and this will reduce
the profits of the firms. This will continue to happen until
there are just normal profits. In the long run, purely
competitive firms earn only normal (zero) profits BECAUSE
THERE ARE NO BARRIERS TO ENTRY.
So, what about monopolies? In this
lesson we will learn that SINCE MONOPOLIES DO HAVE BARRIERS
TO ENRTY (entry is blocked) they will earn economic
profits in the long run. Also, at the profit maximizing
quantity (what we get) monopolies will be both allocatively
and productively INEFFICIENT. When monopolies produce the
quantity that maximizes their profits they will be producing
less than the allocatively efficient quantity
(underallocation of resources) AND they will not be
producing at the lowest possible cost per unit (productive
inefficiency).
Next, we will look at PRICE
DISCRIMINATION. What if instead of charging the same price
to all customers, a monopoly charged different prices to
different customers for the same product? We will learn that
if monopolies price discriminate then they will produce
more, and the market will be MORE allocatively
efficient.
Finally, since monopolies are
inefficient, the government usually prevents them from
forming (anti-trust laws). Sometimes the government will
allow a monopoly to exist if it is in the public interest,
like when it is a natural monopoly, but they will then
regulate it, i.e. set its price.
So in this lesson we will study three
things:
1. monopolies are allocatively and
productively inefficient
2. monopolies that price discriminate may be allocatively
efficient
3. monopolies are often prevented from forming or are broken
up by the government, but the government will allow a
natural monopoly to exist and will regulate its price.
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