Study GuideEconomics–Monopoly1. Monopoly in the Long-Run1.1Short Run vs. Long Run in Perfect CompetitionIn thelong run, all factors of production (like laborand capital) can change. Firms are free toenter orleave the market.•If firms are making high profits, new firms enter.•More firms mean more competition.•Increased competition pushes prices down.As a result,economic profits fall to zero in the long run. Firms still earn normal profits, but notextra (economic) profits.1.2Why Monopoly Is DifferentThis clear short-run and long-run distinction doesnotwork the same way for amonopoly.Why? Because a monopoly faceshigh barriers to entry. These barriers can include legalrestrictions, control over resources, or very high startup costs. Because of these obstacles:•New firms cannot enter the market, even in the long run.•The monopolist does not face competition.•There is no pressure to push prices down.1.3Long-Run Outcome for a MonopolySince no new firms can enter the market, a monopolist can:•Avoid competition•Control supply•Continue earning positive economic profits, even in the long runPreview Mode
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