Google
Saturday 
December 14, 2019 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
LIQUIDITY: The ease of converting an asset into money (either checking accounts or currency) in a timely fashion with little or no loss in value. Money is the standard for liquidity because it is, well, money and no conversion is needed. Other assets, both financial and physical have varying degrees of liquidity. Savings accounts, certificates of deposit, and money market accounts are highly liquid. Stocks, bonds, and are another step down in liquidity. While they can be "cashed in," price fluctuations, brokerage fees, and assorted transactions expenses tend to reduce their money value. Physical assets, like houses, cars, furniture, clothing, food, and the like have substantially less liquidity.

Visit the GLOSS*arama


MONOPOLY, EFFICIENCY:

A monopoly generally produces less output and chargers a higher price than would be the case for perfect competition. In particular, the price charged by a monopoly is higher than the marginal cost of production, which violates the efficiency condition that price equals marginal cost. Monopoly is inefficient because it has market control and faces a negatively-sloped demand curve.
Monopoly does not efficiently allocate resources. In fact, monopoly (if left unregulated) is generally considered the most inefficient of the four market structures. The reason for this inefficiency is found with market control. As the only seller in the market, the negatively-sloped market demand curve is THE demand curve facing the monopoly. If buyers want to buy, they must buy from the monopoly.

The negative slope of the demand curve means that the price charged by the monopoly is greater than marginal revenue. As a profit-maximizing firm that equates marginal revenue with marginal cost, the price charged by monopoly is greater than marginal cost. The inequality between price and marginal cost is what makes monopoly inefficient.

Profit Maximization

Inefficiency
Inefficiency
Consider the production and sale of Amblathan-Plus, the only cure for the deadly (but hypothetical) foot ailment known as amblathanitis. This drug is produced by the noted monopoly firm, Feet-First Pharmaceutical.

A typical profit-maximizing output determination using the marginal revenue and marginal cost approach is presented in this diagram. Feet-First Pharmaceutical maximizes profit by producing output that equates marginal revenue and marginal cost, which is 6 ounces of Amblathan-Plus in this example. The corresponding price charged is $7.50.

This profit-maximizing production is not efficient. In particular, the price is $7.50, but the marginal cost is only $4.50. Society is producing and consuming a good that it values at $7.50 (the price). However, in so doing, society is using resources that could have produced other goods valued at $4.50 (the marginal OPPORTUNITY cost). Society gives up $4.50 worth of value and receives $7.50.

This is a good thing. It is so good, that society should do more. However, the monopoly is not letting this happen. Feet-First Pharmaceutical is not devoting as many resources to the production of Amblathan-Plus as society would like.

An Efficient Alternative

The degree of monopoly inefficiency can be illustrated with a comparison to perfect competition. Such a comparison is easily accomplished by clicking the [Perfect Competition] button. A primary use of perfect competition is to provide a benchmark for the comparison with other market structures, such as monopoly.

A comparison between monopoly and perfect competition indicates:

  • Monopoly produces less output than perfect competition. In this example, monopoly produces 6 ounces of Amblathan-Plus compared to about 7.5 ounces for perfect competition. The Feet-First Pharmaceutical monopoly does not allocate enough resources to the production of Amblathan-Plus.

  • Monopoly charges a higher price than perfect competition. In this example, the monopoly price is $7.50 per ounce versus about $6.75 per ounce for perfect competition. The Feet-First Pharmaceutical monopoly is NOT efficient because it produces at a quantity in which price is greater than marginal cost.

<= MONOPOLY, DEMANDMONOPOLY, FACTOR MARKET ANALYSIS =>


Recommended Citation:

MONOPOLY, EFFICIENCY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: December 14, 2019].


Check Out These Related Terms...

     | monopoly, profit maximization | monopoly, loss minimization | monopoly, shutdown | short-run production alternatives | breakeven output | monopoly, revenue division | monopoly, short-run supply curve |


Or For A Little Background...

     | monopoly | monopoly, characteristics | efficiency | scarcity | perfect competition, efficiency | profit maximization | economic profit | marginal revenue, monopoly | marginal cost | monopoly, profit maximization |


And For Further Study...

     | monopoly, demand | monopoly, short-run production analysis | monopoly, efficiency | monopoly, total analysis | monopoly, marginal analysis | monopoly, profit analysis |


Search Again?

Back to the WEB*pedia


APLS

BLACK DISMALAPOD
[What's This?]

Today, you are likely to spend a great deal of time browsing through a long list of dot com websites seeking to buy either a coffee cup commemorating the first day of winter or a video game player. Be on the lookout for mail order catalogs with hidden messages.
Your Complete Scope

This isn't me! What am I?

In his older years, Andrew Carnegie seldom carried money because he was offended by its sight and touch.
"In order to create there must be a dynamic force, and what force is more potent than love."

-- Igor Stravinsky, violinist

RCPC
Regional Check Processing Center
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2019 AmosWEB*LLC
Send comments or questions to: WebMaster