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The first possibility is to leave the natural monopoly alone. In this case, the monopoly will follow its normal approach to maximizing profits. It determines the quantity where MR = MC, which happens at point P at a quantity of 4. The firm then looks to point A on the demand curve to find that it can charge a price of 9.3 for that profit-maximizing quantity. Since the price is above the average cost curve, the natural monopoly would earn economic profits.

A second outcome arises if antitrust authorities decide to divide the company, so that the new firms can compete. As a simple example, imagine that the company is cut in half. Thus, instead of one large firm producing a quantity of 4, two half-size firms each produce a quantity of 2. Because of the declining average cost curve (AC), the average cost of production for each of the half-size companies each producing 2, as shown at point B, would be 9.75, while the average cost of production for a larger firm producing 4 would only be 7.75. Thus, the economy would become less productively efficient, since the good is being produced at a higher average cost. In a situation with a downward-sloping average cost curve, two smaller firms will always have higher average costs of production than one larger firm for any quantity of total output. In addition, the antitrust authorities must worry that splitting the natural monopoly into pieces may be only the start of their problems. If one of the two firms grows larger than the other, it will have lower average costs and may be able to drive its competitor out of the market. Alternatively, two firms in a market may discover subtle ways of coordinating their behavior and keeping prices high. Either way, the result will not be the greater competition that was desired.

A third alternative is that regulators may decide to set prices and quantities produced for this industry. The regulators will try to choose a point along the market demand curve that benefits both consumers and the broader social interest. Point C illustrates one tempting choice: the regulator requires that the firm produce the quantity of output where marginal cost crosses the demand curve at an output of 8, and charge the price of 3.5, which is equal to marginal cost    at that point. This rule is appealing because it requires price to be set equal to marginal cost, which is what would occur in a perfectly competitive market, and it would assure consumers a higher quantity and lower price than at the monopoly choice A. In fact, efficient allocation of resources would occur at point C, since the value to the consumers of the last unit bought and sold in this market is equal to the marginal cost of producing it.

Attempting to bring about point C through force of regulation, however, runs into a severe difficulty. At point C, with an output of 8, a price of 3.5 is below the average cost of production, which is 5.7, and so if the firm charges a price of 3.5, it will be suffering losses. Unless the regulators or the government offer the firm an ongoing public subsidy (and there are numerous political problems with that option), the firm will lose money and go out of business.

Questions & Answers

What do you means by patten law in economic?
Tamba Reply
Do you mean patent law or patten law?
Addin
Patent I'm sorry..
Tamba
Australian patent law is law governing the granting of a temporary monopoly on the use of an invention, in exchange for the publication and free use of the invention after a certain time. The primary piece of legislation is thePatents Act 1990 (Cth).
Addin
Demand for canned goods when it was reported that super typhoon hagupit will landfall in the Philippine area of responsibility on sunday night
leonard Reply
opportunity cost ?
abdullah
opportunity cost is the alternative forgone after making a choice
Kotey
what is macroeconomic
ALIYU Reply
its the study of the interractions of the various components of economics as a whole
Kotey
please suggest me topic for research, about following issues 1. labor migration & economic growth 2. terrorism and trade 3. religious pessimism and trad
Fayaz Reply
state the law of diminishing returns.
Ronaxic Reply
the law diminishing returns states that as more and more units of variable factors of production(such as capital, labour) are combined with a fixed factor (such as land) after a certain point, the marginal product diminishes or declines
Vanessa
I would like to add one more point In the above statement. The addition of more variable factors of production will only leads to diminishing returns if the existing fixed capacity is fully utilised.
Ankit
what is diminishing marginal utility
Ronaxic Reply
with more units of consumption of a same commodity you will feel less satisfied with every next commodity. if you are thirsty you purchase a bottle of Coca-Cola and drink it, you will be satisfied at the same time again you drink another bottle of Cola you will be less satisfied in comparison.
Ankit
utility nothing it is just a measurement of your satisfaction.
Ankit
and diminishes as long as you consume same commodity continuously
Ankit
how to calculate the national income
Mujittapha
what is the problem of economic in the world?
jacob
i think the problem of economics is how to use scarce resources to satisfy unlimited wants
Kotey
what is taxation
K.visor Reply
levy paid by eligible individuals and companies to the government
Kingt
tax
Raji
A means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Governments use taxation to encourage or discourage certain economic decisions.
Raji
a source of economic revenue in which working citizens pay levy which varies from one individual to the other.
Vanessa
monies paid by residents of a country to the government in which the residents benefit indirectly
Kotey
it's the government, looking for funding to create public goods and services so that everyone can be happy.
Sinethemba
why does the demand curve slop downward
Ronaxic
thanks
Ronaxic
why does the demand curve slop downward?
Ronaxic
the demand curve is nothing but a line which shows willingness to purchase a commodity or a thing.For example, if you want to purchase a Pepsi can you are willing to purchase 5 Pepsi cans if they are of $3 each. but if they are of $5 each you want to purchase only three of them.
Ankit
so at Higher prices you like to purchase less quantity that's why demand curve falls down words. but please note demand curve does not fall downwards always for inferior goods the rise up parts like a supply curve because at Higher prices you tend to purchase those goods more
Ankit
and at lower prices of inferior goods you tend to avoid them and relocate your Limited money to other goods.
Ankit
what is taxation?
jacob Reply
In simple term. Taxation can be defined as compulsory payment levy on company or individual by the government. It can be direct or indirect.
salawu
what is capital
K.visor
its nice
Belaisan
it's nice
Abdulwali
capital , it is a investment of money or assets which is invested before starting up of the business
Madhu
its nice
Belaisan
disadvantage of money
Bigdreamz Reply
it won't let you sleep
Ankit
Please any Ghanaian schooling at KNUST?
Prince Reply
combining factors of production is the role of
Richard Reply
the situation in economic where by a more valuable good is sold at a low price while less valuable good is sold at a higher price .how can we describe this situation in economic
Fung
price discrimination
Fayaz
deman and supply
Samim
price discrimination
Citizen
enterlrenure
Fayaz
you can take example of water and daimond. you can ask someone to choose anyone from above 1. to a person in a Sahara desert and 2. a girl in London. you will get your answer
Ankit
it depends upon the buyer's preference what he wants why he wants and what is the necessity of that product at current time.
Ankit
causes of high elasticity of demand
Onyango Reply
causes of high elasticity of supply
Onyango
what is optimazation
lepekola
what is trade offs
lepekola
A trade-off  is a situational decision that involves diminishing one quality, or property of a design in return for gains in other aspects.
Addin
what is indifference curve ?
abdullah
its represnted by the loops of points and gives same level of satisfaction
hisham
what is enterpreneurship
Kukoyi
Entrepreneurship is the talent, knowledge and willingness individual has to engage in an activity that can result in new kind of firm
Addin
what is the short run industry supply curves?
james
I think there' s a mistake. P = - 0.4 + 0.2Qs is the supply curve and not the demand curve. Am I correct?
Valeria Reply
Qs is quantity supplied
The
This is what I think
The
this eaquation is supply curve Qs=P-0.4 the relationship is positive when the price increase the Qs increase....
mukhtaar
since Qs is quantity supplied P= -0.4 + 0.2Qs =>P +0.4=0.2Qs =>P/0.2 + 0.4=Qs I made Qs the subject of the formula or equation. So your answer is correct
The
P = -0.4 + 0.2Qs is the same as P/0.2+0.4=Qs Price has a direct relationship with the quantity supplied i.e the higher the price the higher the quantity supplied. that is why it is +0.4(this is the quantity and it is postive) and P/O.2(is the price and it is positive).
The
For the demand equation let me give an example 0.2P-0.4=Qd. Here the P is postive(+0.2) and the quantity which is -O.4 is negative( because of the negative sign(-) there is an inverse relationship between price and quantity. For quantity demanded the higher the price the lower the quantuty.
The
It's how I understand it
The
0.2P-0.4=Qd. the equation is wrong because the price have direct ralationship Quantity demanded but the correct equation is-0.2P -0.4=Qd so the higher price the lower Quantity
mukhtaar
I think the relationship is inverse because of the negative sign(-)
The
ok You mean the price and quantity demanded should be negative(inverse relationship) for Qd and the price and quantity supplied should be postive(direct relationship) for Qs
The
thank you for the correction
The
yes because it got a positive gradient of +0.2
Michael
This is the mistake I found: "Since P is on the vertical axis, it is easiest if you solve each equation for P. The demand curve is then P = 8 – 0.5Qd and the demand curve is P = –0.4 + 0.2Qs. Note that the vertical intercepts are 8 and –0.4, and the slopes are –0.5 for demand and 0.2 for supply."
Valeria
dear price do not depend on quantity. rather quantity depends on price. so the equation should be Qty=0.2Px-0.4
Michael
please can someone generate supply equation for me
David Reply
ok
Detto
Qs=f(P,Pr,G,E,Z,Pf,)
The
where p is price, Pr is price of related goods, G is goals of a firm E is supplier's future expectation of prices,Z is other related factors, Pf is cost of factors of production.
The
I think it's wrong
The
if Qd=90-p Qs=90+p
The
the coefficient of price must be positive since supply curve is positively slopping
Kotey
yes
The
it's true. thank you
The
welcome
Kotey
ok
The
OK, thank you
David
no one can do that, you must determine the the key factors for the commodity, like price, income, prices of alternative commodity, and other factors, if you want the main equation, you must have 4 values, 2 values for each quantity and price, for one commodity
Chief
What is the acceptable definition of economic?
bilya Reply
The economics is the optimal use for the resources, this is general definition, but from my point view it is the production,
Chief

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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