Monopolies have a negative effect on the entire economy by making it harder for consumers to purchase goods, a trend that leads to lower production in the system. High prices do not affect only the consumer, they end up hurting the monopoly itself. Even systems with more than one competitor can be monopolistic if there are only a few. Competition benefits every human component in the economy.
The ultimate consequence of a monopoly is that overall it reduces society's income. Monopolists take advantage of their unique hold on a market by raising prices above competition level. Because there is no other source from which to purchase the good, people buy it from the monopolist even though it is at a high price. However, the higher price causes consumers to purchase less of the product. As a result of fewer purchases, the monopolist produces less. Thus, goods and money do not diffuse throughout the system the way they do under competition. In this manner, a monopoly reduces aggregate economic welfare.
A monopoly is obviously disadvantageous for the consumer. It subjects them to higher prices and limits their access to goods or services. It restricts consumer choice and sovereignty. Another disadvantage of a monopoly is the lack of innovation. Under competition, firms innovate to offer more than their competitors and capture a greater share of the market. With a monopoly, this incentive to innovate is not present.Learn More
In a monopoly, one firm holds the power to set prices. In an oligopoly, a few firms hold the power to set prices together. When only two firms hold the power to set prices in an industry, it is called a duopoly. A duopoly is a form of oligopoly.Full Answer >
Consumer sovereignty is the economic theory that consumers can best determine what goods and services should be produced in a society. Firms, such as businesses and companies, produce whatever the consumer prefers. Economist William Harold Hutt coined this term in his 1936 book "Economists and the Public."Full Answer >
The main of advantage of free trade is lower prices for consumers, while a disadvantage is that domestic firms often find it difficult to compete with large international firms.Full Answer >
Basic functions of an economic system are to produce and consume goods and services. The way in which people within the economy do this varies based on the type of economic system.Full Answer >