A monopoly contributes to price increases, leads to the creation of inferior products and discourages innovation. Monopolies inhibit free trade and limit the effectiveness of a free-market economy.Know More
In a monopoly the sole provider of a good or service has the ability to fix prices. While there might be relatively little demand for a product, the provider can charge exorbitant prices because consumers are left with no alternatives. Instead of having to innovate and improve to keep pace with the competition, providers may even let the quality of their products decline. Consumers almost always have a choice, but when a monopoly exists, the alternatives available are not easy substitutes.
There are instances when allowing a monopoly can have a positive impact on the economy. Some ventures require a huge upfront capital investment. If a monopoly were not allowed in these cases, no one would participate out of fear they would not be able to recoup their investment and generate a profit. The building of a power plant is one example of this scenario. Once the plant is completed, the company that built it has the exclusive right to market power to a given service area for a predetermined period of time.Learn more about Economics
The quantity of a particular good supplied in a market increases as price goes up because suppliers have an increased interest in producing goods to generate higher amounts of revenue. This is a basic principle of the law of supply and demand.Full Answer >
An upward sloping demand curve indicates that demand for a good or service increases as price increases. Upward sloping demand curves are the result of conspicuous consumption and products known as “Giffen goods.”Full Answer >
According to About.com, the quantity theory of money states that the supply of money in an economy determines the level of prices, and changes in the money supply result in proportional price changes. Therefore, a given percentage change in money supply results in an equivalent level of inflation or deflation.Full Answer >
An example of the way a market economy works is how new technology is priced very high when it is first available for purchase, but the price goes down when more of that technology becomes available. This kind of price fluctuation is a central component of a market economy. That is, supply and demand dictates prices.Full Answer >