When The Price Is Higher Than The Equilibrium Price Supernormal Profit – Consequences of Supernormal Profit and Monopoly in the Businesses

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Supernormal Profit – Consequences of Supernormal Profit and Monopoly in the Businesses

It can be argued that there is no firm that is not a true monopoly because a true monopoly exists when there is only one producer of a good with no close substitutes. However, it can be said that monopoly exists when one firm dominates a market. The demand curve is downward sloping and the monopoly firm is a price taker. Monopoly occurs due to economies of scale (can create a natural monopoly) and the firm controlling an essential factor of production. (can create artificial monopolies).

Monopolies that can make superhuman profits are not necessarily against the public interest, in fact, almost all, if not all, profit-based institutions; Aim to make as much profit as possible at any given time. That means get maximum profit. The fact that monopolies that make exorbitant profits can charge low prices does not indicate that they can charge low prices for goods or services offered to the public.

The perfect competition model and the monopoly model will be used to show how supernormal profits are made by firms. Topics such as the benefits and consequences of retained earnings (short-term and long-term benefits of retained earnings to a firm), types of retained earnings for firms, the concept of retained earnings in relation to consumer or public interest and efficiency, and ways in which firms earn retained earnings. Monopoly firms will be used to explain why the prices they charge for their products are not against the public interest.

Supernumerary profit is profit above normal profit, while normal profit is the amount earned by an organization which is just enough to cover its expenses and is not sinking. Supernatural gains can be in the long or short term. Not all companies make super profits in the short term. Companies making phenomenal profits in any market are signaling that the market is viable and that there is an opportunity to make money. The theory of supply and demand plays an important role in influencing how these induce new suppliers to enter the market and how competition is eliminated for exorbitant profits. However, the rate at which superlative profits are eliminated depends on the barriers to entry in the market or industry.

In a situation where perfect competition exists, there is an optimal allocation of resources. Perfect competition is currently considered a theoretical market and is based on certain assumptions before it exists in the industry. These assumptions are: there should be no barriers to entry, there should be perfect knowledge of the market, there should be a large number of buyers and suppliers who cannot easily influence the market price, homogeneous goods and low transportation costs. However, in the short term, an individual company can make extraordinary profits. This may be as a result of a new invention or a new idea.

These assumptions in perfect competition show that consumers benefit because average revenue equals marginal revenue equals average total cost so only normal profit results. It is P=MR=AR.

On the other hand, monopolistic competition is a situation in which there are many small firms that produce different products and the price and output decisions of any one firm have no effect on the output and decision of other firms. In monopolistic competition, firms typically charge abnormal profits because demand is constant. This income (abnormal profits) is eliminated and usually redistributed to shareholders. This means that if there is abnormal profit, there is also productive and allocative inefficiency. Monopolistic competition can lead to supernormal profits in short-run equilibrium but in the long run due to easy entry into a monopolistically competitive market.

A competitor and a monopolist have one thing in common and that is profit maximization. They both have similar properties except that they operate in 2 different market systems. As we can see in the monopoly model, the marginal cost curve is not the same as in the perfect competition model, the demand curve shows the highest possible price that can be charged for the product at a given level of output. Thus, the monopolist can earn superlative profits by setting the output level at marginal cost equals marginal revenue i.e. MC = MR and setting the price for the product by choosing the point where the demand curve and the vertical line drawn from the point MC= intersect. Mr.

For a perfect competitor, price will always equal marginal revenue, but for a monopolist, price will always exceed marginal cost. When a monopolist is making normal profits, it does not necessarily mean that it is at the lowest point of the average cost curve.

Allocative efficiency is also known as Pareto efficiency and is based on the work of an Italian economist named Vilfredo Pareto. This particular work is called Manuel d’Economie Politique (1909). Allocative efficiency means that it is possible to improve the welfare of one consumer without making another consumer worse off. In order words, resources are allocated efficiently so that the welfare of one group of consumers is improved without making other consumers worse off in the economy.

Productive efficiency is the production of goods and services at minimum cost. This means that it is not possible to produce more of any particular commodity without producing less of the other. This means no waste in the production process.

In monopolistic competition, if both allocative and productive efficiency are applied, consumers will be charged less and the monopolist will earn only normal profit but the price charged will be above marginal cost. This general profit can either be used to increase profits or reduce competition.The demand curve plays a major role in determining the level of production. However, monopoly has its disadvantages such as allocative inefficiency, price discrimination cartels, artificial scarcity and productive/technical inefficiency.

Monopolistic firms make extraordinary profits by differentiating their products from competing products, and this may be through advertising or by making slight changes to the product. Total cost leadership is another way for monopolies to achieve extraordinary profits.

Perfect competition is an ideal model, but it does not actually exist, for example share prices are determined by nearly competitive markets. Perfect competition and monopolistic competition have been criticized. Perfect competition is good for consumers because they will get the goods at the lowest price. It appeals to the public good, while monopoly is considered bad because goods are identical, produce less, and consumers pay more for goods and services than they would in a perfectly competitive market.

In the case of drug companies (largely monopolies), the need for extraordinary profits is needed so that the drug firm can spend more on research and development to develop more drugs to help improve lifestyles. Other large companies are able to develop new products that can bring more technological advancements, pay higher employees, pay raises and bonuses.

Shareholders always want higher returns and this increasing income can only be achieved through extraordinary profits. An employee in a firm in a highly competitive market is always on the edge because he or she can lose his job anytime, an employee would always prefer to work in a better company than such a firm. On the edge of break even.

Finally, it appears that monopolies are not necessarily against the public interest as some of the extraneous profits are used by companies to improve the products they make and this research and development benefits the public while some goes to shareholders.

A monopoly earns super profits in the short run but faces competition from new entrants in the long run due to easy barriers to market entry. Perfect competition is ideal because marginal revenue equals marginal cost, there is no abnormal profit, only normal profit but can prevent future developments, while monopolists have their product priced above marginal cost because when marginal revenue equals marginal cost, profit is maximized. grows

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