Question

Enlist the demerits of monopoly.

Answer 1

1. Lower Output: One of the primary drawbacks of monopoly is that it results in lower output. Unlike in perfect competition, where firms produce more to match the market price, monopolies tend to limit their output to drive up prices and maximize profits. Even though both monopolies and perfectly competitive firms reach equilibrium when MR = MC, the monopolist deliberately restricts production to increase market prices.
2. Higher Prices: Monopolists typically set higher prices for their products to maximize profits. This is achieved by reducing the quantity of goods produced. Unlike perfect competition, where MC = MR = AR = Price, monopolies set prices where MC = MR but MC < AR (Price) because the average revenue (AR) curve always lies above the marginal revenue (MR) curve. Thus, under monopoly, price is always greater than marginal cost, leading to higher consumer prices.
3. Economic Concentration: Monopolies also contribute to economic inequality by concentrating income and wealth within a small group. This concentration widens the gap between the rich (those who own or control the monopoly) and the poor (general consumers), creating social and economic disparities.