In order to observe the effect of the government’s permission to sports association to restrict teams from entering, analyze what would happen if such barriers to entry did not exist. In case all teams that wanted to enter sports competitions were allowed to take part, the rules of demand and supply would govern the situation and hence prices would adjust accordingly (Wheelan, 2003). The market would attain equilibrium at the price for which demand equaled supply.
On the other hand, if the permission to restrict entry is granted, the number of teams attending will be fixed (decrease) and hence prices will adjust according to that number, hence the price per ticket would rise. 2. Adam Smith predicted that a monopolist would charge “the highest price which can be got. ” Do you agree? According to Adam Smith, prices for a commodity are highest when the market for the commodity is monopolized and lowest when a completely free market trades for the commodity.
This is indeed the case because there are no substitutes to goods that a monopoly has to offer (and no other suppliers in the market). Because a monopoly controls the amount of a grocery that is supplied in the market, it has substantial control over the price too. When analyzed graphically, this happens because the firm’s marginal revenue curve meets the marginal cost at a point earlier than for firms in perfect competition- thus leading to lower quantity produced and higher prices. 3.
Why is society worse off under monopoly than under perfect competition, even if both market structures face the same constant long-run average cost? To answer this question, let us consider a perfectly competitive market first. Here, prices are determined by the market and a certain number of consumers buy the good. On the other hand, in a monopoly the quantity in the market is decided by the firm and hence the people who can pay the highest price for the limited number of the commodity available manage to purchase it.
Therefore there exist a significant number of potential buyers of the good who have been deprived of the utility of consuming it simply because the firm did not produce a sufficient quantity. Albeit the monopolist makes greater producer surplus than is usually the case in perfect competition, the loss in consumer surplus is greater than the producer’s gain and hence the net result is a loss of efficiency. 4. Why does the demand curve facing a monopolistically competitive firm slope downward in the long run, even after the entry of new firms?
The demand curve of the monopolistic firm is downward sloping because of the same reason that the demand curve of the perfectly competitive firm is downward sloping. The main reason for the negative slope is the fact that price is inversely related with demand, and hence as a commodity becomes expensive, fewer people in the society are able to afford it. This holds true for both the competitive and the monopolistic firm. Hence in the long run, when a monopoly becomes a competitive market due to entry of other firms, the same downward sloping demand curve holds.
Book Wheelan, C. (2003). Naked Economics. USA.