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Monopolies that make super normal profits aren't in the public interest because they could charge a lower price than they do.

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Introduction

Title: Monopolies that make super normal profits aren't in the public interest because they could charge a lower price than they do. Introduction: Monopoly is an emotive word, and the immediate reaction is that it should be replaced with competition. In this investigation we are going to look at what is a monopoly, what are barriers to entry and what types of barriers there are, what are normal and supernormal profits and to they bear any benefits to the public. What is a monopoly? Monopoly is a market situation in which there is a single seller of a product and there are no close substitutes of this product in the market. The firm has all the market to its self and the customer depends on the firm for the supply of the product. The monopolists are the industry and the firms demand curve is also the market demand curve. In this case the firm has some discretion over the price it charges. The firm may increase or decrease the price with out fear of retaliation form other firms. ...read more.

Middle

Government licensing Government licensing constitute legal barriers to entry, most legal barriers limit the number of competitors, but do not result in a single pure monopoly firm. For example many states require hospitals and nursing homes to file a Certificate of Need to obtain permission to expand. Such laws are designed to prevent unnecessary duplication of services, but they also result in reduction of the number of hospitals. Many state governments require licenses for alcohol shops, barbershops, funeral parlours and other establishments. Why do legal barriers to entry exist in these industries? Ostensibly, these barriers exist to protect the public - you wouldn't want you heir cut by just anyone but a trained professional. Barriers to entry often serve businesses more than the public. Requiring the licences reduce the number of competitors and increase the monopoly power of firms within the industry. Government authorisation is needed to engage in business. To obtain a licence, various requirements must be met, and the number of licences is often restricted. ...read more.

Conclusion

For example if a firm is making 5% profit, but it could have made 10% by investing in another operation, it is making less than normal profit and it should invest its money elsewhere. What is a supernormal profit? Profits above and beyond normal profits are called economic or supernormal profits. Economic profits consist of the surplus of the firms' revenues over the cost of production, including opportunity cost. Some economists would define economic profits as profits great enough to allow the firm to expand; however, the existence of supernormal profits does not necessarily mean that the firm will expand, so this definition must be used carefully. Supernormal profits are profits that are greater than the rate necessary to maintain the established level of production. Conclusion Spontaneous monopolies may abuse their fortunate position in order to make high profits and sell their products at higher prices to achieve those high profits. A firm in a monopoly position may charge the customers a high price for a product with low quality. A famous example comes form the United Stated with Microsoft having a monopoly of 85% in the software industry. ...read more.

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