<< Chapter < Page Chapter >> Page >

The rest is history

In the opening case, the East India Company and the Confederate States were presented as a monopoly or near monopoly provider of a good. Nearly every American schoolchild knows the result of the ‘unwelcome visit’ the ‘Mohawks’ bestowed upon Boston Harbor’s tea-bearing ships—the Boston Tea Party. Regarding the cotton industry, we also know Great Britain remained neutral during the Civil War, taking neither side during the conflict.

Did the monopoly nature of these business have unintended and historical consequences? Might the American Revolution have been deterred, if the East India Company had sailed the tea-bearing ships back to England? Might the southern states have made different decisions had they not been so confident “King Cotton” would force diplomatic recognition of the Confederate States of America? Of course, it is not possible to definitively answer these questions; after all we cannot roll back the clock and try a different scenario. We can, however, consider the monopoly nature of these businesses and the roles they played and hypothesize about what might have occurred under different circumstances.

Perhaps if there had been legal free tea trade, the colonists would have seen things differently; there was smuggled Dutch tea in the colonial market. If the colonists had been able to freely purchase Dutch tea, they would have paid lower prices and avoided the tax.

What about the cotton monopoly? With one in five jobs in Great Britain depending on Southern cotton and the Confederate States nearly the sole provider of that cotton, why did Great Britain remain neutral during the Civil War? At the beginning of the war, Britain simply drew down massive stores of cotton. These stockpiles lasted until near the end of 1862. Why did Britain not recognize the Confederacy at that point? Two reasons: The Emancipation Proclamation and new sources of cotton. Having outlawed slavery throughout the United Kingdom in 1833, it was politically impossible for Great Britain, empty cotton warehouses or not, to recognize, diplomatically, the Confederate States. In addition, during the two years it took to draw down the stockpiles, Britain expanded cotton imports from India, Egypt, and Brazil.

Monopoly sellers often see no threats to their superior marketplace position. In these examples did the power of the monopoly blind the decision makers to other possibilities? Perhaps. But, as they say, the rest is history.

Key concepts and summary

A monopolist is not a price taker, because when it decides what quantity to produce, it also determines the market price. For a monopolist, total revenue is relatively low at low quantities of output, because not much is being sold. Total revenue is also relatively low at very high quantities of output, because a very high quantity will sell only at a low price. Thus, total revenue for a monopolist will start low, rise, and then decline. The marginal revenue for a monopolist from selling additional units will decline. Each additional unit sold by a monopolist will push down the overall market price, and as more units are sold, this lower price applies to more and more units.

The monopolist will select the profit-maximizing level of output where MR = MC, and then charge the price for that quantity of output as determined by the market demand curve. If that price is above average cost, the monopolist earns positive profits.

Monopolists are not productively efficient, because they do not produce at the minimum of the average cost curve. Monopolists are not allocatively efficient, because they do not produce at the quantity where P = MC. As a result, monopolists produce less, at a higher average cost, and charge a higher price than would a combination of firms in a perfectly competitive industry. Monopolists also may lack incentives for innovation, because they need not fear entry.

Problems

Draw the demand curve, marginal revenue, and marginal cost curves from [link] , and identify the quantity of output the monopoly wishes to supply and the price it will charge. Suppose demand for the monopoly’s product increases dramatically. Draw the new demand curve. What happens to the marginal revenue as a result of the increase in demand? What happens to the marginal cost curve? Identify the new profit-maximizing quantity and price. Does the answer make sense to you?

Got questions? Get instant answers now!

Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the monopolist’s profit-maximizing output level. Now, think about a slightly higher level of output (say Q 0 + 1). According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output? If so, what does this mean?

Got questions? Get instant answers now!

References

Aboukhadijeh, Feross. “Chapter 20: Girding for War - The North and the South, 1861-1865.” StudyNotes, Inc . Accessed July 7, 2013. http://www.apstudynotes.org/us-history/outlines/chapter-20-girding-for-war-the-north-and-the-south-1861-1865/.

British Parliament. “(28 August 1833). Slavery Abolition Act 1833; Section LXIV.” Accessed July 2013. http://www.pdavis.nl/Legis_07.htm.

Dattel, E. (nd). "Cotton and the Civil War." Mississippi Historical Society . Accessed July 2013. http://mshistorynow.mdah.state.ms.us/articles/291/cotton-and-the-civil-war.

Gartner. 2015. “Gartner Says Tablet Sales Continue to Be Slow in 2015.” Accessed March 12, 2015. http://www.gartner.com/newsroom/id/2954317.

Grogan, David. 2015. “Federal Judge Finds AmEx’s Anti-Steering Rule Violates Antitrust Law.” American Booksellers Association. Accessed March 12, 2015. http://www.bookweb.org/news/federal-judge-finds-amex%E2%80%99s-anti-steering-rule-violates-antitrust-law.

Massachusetts Historical Society. “The Coming of the American Revolution 1764-1776: The Boston Tea Party.” Retrieved from http://www.masshist.org/revolution/teaparty.php.

Massachusetts Historical Society. “Whereas our Nation.” The Massachusetts Gazette , p. 2. Accessed July 2013 http://www.masshist.org/revolution/image-viewer.php?old=1&item_id=457&img_step=1&nmask=1&mode=large.

Pelegrin, William. 2015. “Judge Overrules Antitrust Case Against Google , Says Setting Default Search Engines Is Fair.” Digital Trends. Accessed March 12, 2015. http://www.digitaltrends.com/mobile/judge-tosses-out-google-antitrust-lawsuit/.

Questions & Answers

what is labor
Grace Reply
labor is any physical or mental effort that helps in the production of goods and services
Kwabena
what is profit maximizing level of out put for above hypothetical firm TC = Q3 - 21Q2 + 600 + 1800 P = 600 MC = 3Q2 - 42Q + 600
Sosna Reply
consider two goods X and Y. When the price of Y changes from 10 to 20. The quantity demanded of X changes from 40 to 35. Calculate cross elasticity of demand for X.
Sosna
sorry it the mistake answer it is question
Sosna
consider two goods X and Y. When the price of Y changes from 10 to 20. The quantity demanded of X changes from 40 to 35. Calculate cross elasticity of demand for X.
Sosna
The formula for calculation income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.
Sosna
what is labor productivity
Lizzy Reply
if the demand function is q=25-4p+p² 1.find elasticity of demand at the point p=5?
Puja Reply
what are some of the difference between monopoly and perfect competition market
Obeng Reply
n a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economic
Naima
what are some characteristics of monopoly market
Obeng Reply
explicit cost is seen as a total experiences in the business or the salary (wages) that a firm pay to employee.
Idagu Reply
what is price elasticity
Fosua
...
krishna
it is the degree of responsiveness to a percentage change in the price of the commodity
Obeng
economics is known to be the field
John Reply
what is monopoly
Peter Reply
what is taxation
Peter
why do monopoly make excess profit in both long run and short run
Adeola Reply
because monopoly have no competitor on the market and they are price makers,therefore,they can easily increase the princes and produce small quantity of goods but still consumers will still buy....
Kennedy
how to identify a perfect market graph
Adeola Reply
what is the investment
jimmy
investment is a money u used to the business
Mohamed
investment is the purchase of good that are not consumed today but are used in the future to create wealth.
Amina
investment is the good that are not consumed
Fosua
What is supply
Fosua
 Supply represents how much the market can offer.
Yusif
it is the quantity of commodity producers produces at the market
Obeng
what is the effect of scarce resources on producers
Phindu Reply
explain how government taxes and government producer subsidies affect supply
Chanda
what is economic
Charles Reply
what are the type of economic
Charles
macroeconomics,microeconomics,positive economics and negative economics
Gladys
what are the factors of production
Gladys
process of production
Mutia
Basically factors of production are four (4) namely: 1. Entrepreneur 2. Capital 3. Labour and; 4. Land but there has been a new argument to include an addition one to the the numbers to 5 which is "Technology"
Elisha
what is land as a factor of production
Gladys
what is Economic
Abu
economics is how individuals bussiness and governments make the best decisions to get what they want and how these choices interact in the market
Nandisha
Economics as a social science, which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.
Yhaar
Economics is a science which study human behaviour as a relationship between ends and scarce means
John
Economics is a social sciences which studies human behavior as a relationship between ends and scarce mean, which have alternative uses.....
Pintu
how will a country's population be equal to it's labour force
Hope Reply
what is the meaning of ppf
Obeng Reply
Production Possibility Frontier
Igbekele

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask