![]() Natural monopolies are actually beneficial to society because they charge low prices and promote productive efficiency. Since other firms cannot compete with these low costs, it drives them out of the business and allows the dominant firm to monopolize the industry. They determine the terms of access to other firms.Ī natural monopoly occurs when an individual firm comes to dominate an industry by producing goods and services at the lowest possible production cost. ![]() The suppliers in this market will also have excess production capacity.A monopoly is a market structure in which an individual firm has sufficient control of an industry or market. As a result, the market will suffer deadweight loss. ![]() Due to how products are priced in this market, consumer surplus decreases below the pareto optimal levels you would find in a perfectly competitive market, at least in the short run. Because the individual firm's demand curve is downward sloping, reflecting market power, the price these firms will charge will exceed their marginal costs. Monopolistically competitive firms maximize their profit when they produce at a level where its marginal costs equals its marginal revenues. As a result, a business that works on its branding can increase its prices without risking its consumer base. By differentiating its products, firms in a monopolistically competitive market ensure that its products are imperfect substitutes for each other. The source of the market power is that there are comparatively fewer competitors than in a competitive market, so businesses focus on product differentiation, or differences unrelated to price. In this type of market, these firms have a limited ability to dictate the price of its products a firm is a price setter not a price taker (at least to some degree). This is due to the fact that firms have market power: they can raise prices without losing all of their customers. The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm's individual demand curve is perfectly elastic. Monopolistic Competition: As you can see from this chart, the demand curve (marked in red) slopes downward, signifying elastic demand. While this appears to be relatively straightforward, the shape of the demand curve has several important implications for firms in a monopolistic competitive market. This means that as price decreases, the quantity demanded for that good increases. The demand curve of a monopolistic competitive market slopes downward.
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