Question

Discuss the economic effects of monopoly and its impact on large-scale production and unit cost of production.

Answer 1

A monopoly takes place in a market, when there is only one supplier in the entire industry. The consumers are then forced to purchase from that only supplier. The economic result is that the organization can charge whatever price it wants for the product and consumers are left with no choice.

If the product is high in demand, the monopoly would earn significant profits. Monopolies result from a situation in which there are high restrictions or barriers to entry such as defense, railways etc or where they are the only ones able to produce the product which may be a result of superior technology or patent rights.

The per unit costs of manufacturing under a monopoly tend to be low. This is because they earn super profits from their sales. If you are the only seller in the market with no competition the consumers are forced to buy from you. In that case the price of the product can be kept whatever gives the company maximum profit because demand for the product would not fall as no substitutes are available in the market type.

Further, if monopolies exist in a market type, where the demand is very high, they can engage in large scale production. This further increases the overall profit levels as variable cost of production per unit decreases as we go on increasing production.

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