Thursday, 18 December 2008

Be careful of revision sites!

In this blog we are told of a revision site - the famous s-cool site.

BUT you have been doing Economics long enough to be critical in your approach.

Go and look at the diagram on Monopoly on this page - a huge mistake!

Here is the text and diagram:

Monopoly is the antithesis of perfect competition. It is the least competitive market structure, with only one firm in the industry. The following diagram sums up why the market fails when there is a lack of competition in a given industry. You may need to look at the topics of 'Costs and revenues' and 'Market structure' if you do not remember where these curves come from.

The diagram shows the situation faced by a monopolist. The monopolist maximises profit where marginal cost equals marginal revenue (MC = MR). This gives a price of Pm and quantity Qm. Its profit is represented by the shaded box, which is the difference between total revenue (OPmEQm) and total cost (OFDQm). Remember that, because this is the only firm in the industry, this diagram represents the whole industry. So if this industry was perfectly competitive, the equilibrium would occur at point B, where the demand and supply curves cross (AR = MC). This gives a price of Ppc and a quantity of Qpc.

Notice that the lack of competition in monopoly means that the price is higher and quantity supplied/demanded is lower than under perfectly competitive circumstances. More importantly, the monopolist is not producing at a level of output that is either allocatively efficient (which occurs at point B, where price = MC) or productively efficient (which occurs at point A, the minimum point of the AC curve). Under monopoly, the market fails in that it is not efficient using any measure.


Now go back to the diagram on the page - where is the HUGE mistake?


2 comments:

  1. if a competition is perfectly competitive, i think that Marginal Cost curve should intersect at the lowest point of Average Cost.. to achieve productive efficiency?

    ReplyDelete
  2. MC should always cut AC at the lowest point - not just in perfect competition. Also the text refers to 'A' but in fact A is...on the diagram but not at any particular point

    Maybe you should write and tell them?

    ReplyDelete

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Methods there are many, principles but few, methods often change, principles never do