Monopoly and Monopolistic Competition

Monopoly and Monopolistic Competition

When deciding on price and quantity in a monopoly market, there are essential factors to consider. First, it is essential to note that there are only one producer and many customers.  This is the case with Tesla in which it is the only producer of electric vehicles, and it has no competitors. Further, due to the lack of economic competitor, Tesla controls the price of electric vehicles. It is the price market price determiner hence decides on the quantity to produce. Lastly, since there are no substitutes for electric vehicles, consumers have no choice and have to buy at a price set by the monopolist. Profit maximization for monopolist implies that they want to increase the difference between revenues and spending. This requires that that look check on marginal revenue (MR) and the marginal cost. If the marginal revenue is more than the marginal cost, then the company is making profits.  It, therefore, means that profit maximization involves equating marginal revenue and marginal cost (MC=MR).

(Alexander, 2001).

From the graph, monopolist maximizes profits at price and quantity along the demand curve when MC=MR. Even though the monopolist is the price determinant, it has to set a price that will increase sales since extreme high prices mean a decline in sales volume..

Profit maximization quantity and price for Tesla can be determined by analyzing the marginal revenue and marginal cost realized from producing one extra unit. The quantity and price are arrived at by equating the marginal revenue with the corresponding marginal cost. For Tesla to determine its profit-maximizing output and price, it has to have data concerning market demand and prices in each production level.

In this case, we consider the production table below. For every unit produced, there is a corresponding price and production cost.

Assuming that the table above represents the market demand schedule that Tesla as a monopolist’s faces; then it can be noted that as the price declines, the total output demand rises. It can also be observed in the third column the total revenues Tesla receives per each every unit of output. Further, there is a column with Tesla’s marginal revenue which represents the change in total revenue for one unit of output produced. The total cost incurred in producing between 0 to 5 units are recorded in the fifth column while in the sixth, and the seventh contains the average total costs and marginal costs respectively. The difference between total revenue and total costs represents monopolist’s profits in each level of output as recorded in the last column.

As noted earlier, profit-maximizing output and price are determined when marginal cost is equal to marginal revenue. In this case, Tesla will produce 3 units of output and sell at $8 since MC=MR=$4.

8. B) In the case of entry of other firms in the market, then the market becomes a monopolistic competition market. Profit maximizing price and output level is determined in the same way as in the monopolistic market.  Since Tesla will still have a downward-sloping demand curve, it will choose along its demand curve an integration of price and quantity that maximizes the profits at the interplay of the marginal cost curve and marginal revenue curve. From the graph above, Tesla will choose price and output quantity when MC=MR along the demand curve. In this case, quantity produced to maximize profits will be 3 units charged at $8. In other industries, the monopolistic competitor may decide what price to charge despite the entry of new firms. Such cases happen when the firm has strong product differentiation and loyal customers. This may be applied to Tesla since it had been in the industry for a long time enjoying a monopoly.

The main difference between monopoly market and monopolistic competition is that in monopoly there is only one producer while for monopolistic competition there are many producers. This presents customers with substitutes, and they have an option to buy from. Tesla can decide the profit-maximizing level of output, considering its marginal revenue and cost. If Tesla produces output quantity in which marginal revenue is more than marginal cost, then it should expand its production.  This is because the additional marginal cost would create more profit, therefore, increasing total revenue. The firms need to adjust until marginal revenue is equal to marginal cost. On the other hand, if Tesla produces where marginal cost is more than marginal revenue, that it implies that every marginal unit is expensive than the revenue it creates. In such a case, the firm needs to increase its profits by decreasing the output quantity. The output quantity should be adjusted until it reaches a point where marginal revenue is the same as marginal cost. At the point where MC and MR intersect, the quantity and price are used for profit maximization.

It is essential to note that monopolistic competitor has demand curves that run downwards which is the market demand curve based on the level of its product differentiation and number of rivals in the market (Goering, 2014). In this market, Tesla will depend on product differentiation strategies to outweigh its rivals in the industry. It will be no longer the only price maker in the market, and the decisions of its rivals influence its decisions.  Tesla needs to expect more new entries in the market since it realized abnormal profits in the long run as the only supplier in the market. When potential companies realize abnormal profits in electric vehicle production, then many would like to enter the industry.

References

Alexander, D. L. (2001). Major League Baseball: Monopoly pricing and profit-maximizing behaviour. Journal of Sports Economics, 2(4), 341-355.

Goering, G. E. (2014). The profit‐maximizing case for corporate social responsibility in a bilateral monopoly. Managerial and Decision Economics, 35(7), 493-499.