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