Are monopolies efficient in the long run?

Are monopolies efficient in the long run?

A monopolistically competitive industry does not display productive and allocative efficiency in either the short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits.

What happens to a monopoly in the long run?

Long Run Equilibrium of Monopolistic Competition: In the long run, a firm in a monopolistic competitive market will product the amount of goods where the long run marginal cost (LRMC) curve intersects marginal revenue (MR). The result is that in the long-term the firm will break even.

Can productive efficiency be achieved in the long run?

Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market.

Where is productive efficiency on a monopoly graph?

1. Productive efficiency: occurs where P= min ATC. Monopoly firms will not achieve productive efficiency as firms will produce at an output which is less than the output of min ATC. X-inefficiency may occur since there is no competitive pressure to produce at the minimum possible costs.

Can a monopoly firm earn supernormal profit in the long run?

Monopolies can maintain super-normal profits in the long run. As with all firms, profits are maximised when MC = MR. At profit maximisation, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC).

Can a perfectly 100% efficient system ever be created?

Most machines transfer energy from one place or another, or transform one form of energy (e.g. chemical) into another (e.g. mechanical), but machines can`t create any form of energy. This tendency of systems to lose energy is called entropy. That is why 100% efficiency in machines shall not be possible.

Is perfect competition Allocatively efficient in the long-run?

Perfect competition is considered to be “perfect” because both allocative and productive efficiency are met at the same time in a long-run equilibrium. Only if P = MC, the rule applied by a profit-maximizing perfectly competitive firm, will society’s costs and benefits be in balance.

Is there allocative efficiency in a monopoly?

The Allocative Inefficiency of Monopoly. Thus, monopolies don’t produce enough output to be allocatively efficient. Thus, consumers will suffer from a monopoly because it will sell a lower quantity in the market, at a higher price, than would have been the case in a perfectly competitive market.

What causes allocative inefficiency?

Allocative inefficiency occurs when the consumer does not pay an efficient price. This is efficient because the revenue received is just enough to ensure that all the resources used in the making of a product are sufficiently rewarded to encourage them to continue supplying.

Is it true that in the long run a monopolistically competitive firm has market power but earns no profit?

Companies in a monopolistic competition make economic profits in the short run, but in the long run, they make zero economic profit. The latter is also a result of the freedom of entry and exit in the industry.

How is productive efficiency determined in a monopoly?

We can clearly see that for the perfectly competitive firm, productive efficiency automatically arises as in long run equilibrium MC=AC at point X. However, in the case of monopoly, the firm is not operating on the lowest point of its AC curve (point X ) but is instead operating on some higher point (point S).

Why are monopolies good for the long run?

Long run average costs. It is assumed monopolies have a degree of economies of scale, which enables them to benefit from lower long-run average costs. In a competitive market, firms may produce quantity Q2 and have average costs of AC2. A monopoly can produce more and have lower average costs.

Where does productive efficiency occur in perfect competition?

Since the marginal cost curve always passes through the lowest point of the average cost curve, it follows that productive efficiency is achieved where MC= AC. The diagrams in Figure 1 show the long run equilibrium positions of the firm in perfect competition and the monopolist.

How does a monopoly create long run equilibrium?

Long Run Equilibrium Under Monopoly: The monopolist creates barriers of entry for the new firms into the industry. The entry into the industry is blocked by having control over the raw materials needed for the production of goods or he may hold full rights to the production of a certain good (patent) or the market of the good may be limited.