Characteristics of Indifference Curve

Topics: Economics, Perfect competition, Monopoly Pages: 1 (265 words) Published: March 13, 2013
1. Economies of Scale.

If the firms produces in an industry with very high fixed costs, consumers can benefit from a large firm which can exploit economies of scale. Economies of scale lead to lower long run average costs and therefore give the potential of lower prices. Example: Would you want several firms providing tap water? Would it make sense to have 2-3 companies laying a network of water pipes and sewage systems across the country? No. It is better to have 1 firm. This is an example of an industry which is a natural monopoly because of the extensive fixed costs. Industries like car production and airline production also have significant economies of scale so it makes sense for firms to have some degree of market power. * However, just because a firm has monopoly power doesn’t mean that the industry necessarily has economies of scale or that lower average costs lead to lower prices.

2. Research and Development
Firms with monopoly profit can use their profit to invest in new products and technologies that benefit consumers in the long run. e.g. oil companies who find new sources of oil 3. Monopoly Firms are Efficient

An argument popular with economists of the Austrian School of Economics is that firms who gain monopoly power are invariably successful, innovative and efficient. e.g. Google have monopoly power but who can do it any better? 4. International Competition

A domestic monopoly may face international competition, therefore it still faces incentives to cut costs and be efficient. However, it can also benefit from economies of scale.
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