Page 170 - DECO405_MANAGERIAL_ECONOMICS

Unit 10: Imperfect Competition – Monopoly

In Figure 10.4, we depict the case where the size of the market is so large that the monopolist, in Notes
order to maximise his output, must build a plant larger than the optimal and over utilise it. This
is because to the right of the minimum point of the LAC the SRAC and the LAC are tangent at a
point of their positive slope and also because the SRMC must be equal to the LAC. Thus, the
plant that maximises the monopolist's profits leads to higher costs for two reasons: firstly,
because it is larger than the optimal size and secondly because, it is over utilised.
Figure 10.4

Finally, in Figure 10.5 we show the case in which the market size is just large enough to permit
the monopolist to build the optimal plant and use it at full capacity.
Figure 10.5

It should be clear as to which of the above situations will emerge in any particular case depends
on the size of the market (given the technology of the monopolist).

Task Try to find out the organisations closer to monopoly competition in the
real world.

Did u know? What is Herfindhal Index?
It is commonly used by government bodies while measuring the degree of competition in
a market. It takes into account the size distribution of firms.

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