Benefits of Monopolies, Fixed Costs, and Implications
Benefits of Monopoly: Incentives for R and D
patents are one way rewarding research and development
if patents aren’t enforced or if drug prices are controlled, fewer drugs will be invented
without patents, firms wouldn’t spend on R and D, fewer new drugs would be developed
Fixed Costs
fixed costs: expenses that don’t depend on level of production and are recurring over a period of time
rent, interest payments, etc.
aka: indirect or overhead costs
total costs are fixed costs and variable costs
Welfare Implications of Monopoly
consumers: worse off
monopolists charge higher prices, produce less
producers: benefit
receive a higher price for product than they normally would
efficiency: total surplus which means consumer + producer surplus
consumer surplus will be lower
producer surplus will be higher
Monopoly With Fixed Costs
given TC = 500 + 120(Q)
marginal costs = 120
average costs: 500/Q + 120
as production increases, average costs approaches marginal costs
given inverse demand curve P = 600 - 3Q
marginal revenues: MR = 600 - 6Q
Benefits of Monopolies, Fixed Costs, and Implications
Benefits of Monopoly: Incentives for R and D
patents are one way rewarding research and development
if patents aren’t enforced or if drug prices are controlled, fewer drugs will be invented
without patents, firms wouldn’t spend on R and D, fewer new drugs would be developed
Fixed Costs
fixed costs: expenses that don’t depend on level of production and are recurring over a period of time
rent, interest payments, etc.
aka: indirect or overhead costs
total costs are fixed costs and variable costs
Welfare Implications of Monopoly
consumers: worse off
monopolists charge higher prices, produce less
producers: benefit
receive a higher price for product than they normally would
efficiency: total surplus which means consumer + producer surplus
consumer surplus will be lower
producer surplus will be higher
Monopoly With Fixed Costs
given TC = 500 + 120(Q)
marginal costs = 120
average costs: 500/Q + 120
as production increases, average costs approaches marginal costs
given inverse demand curve P = 600 - 3Q
marginal revenues: MR = 600 - 6Q