Supernormal Profit – Consequences of Supernormal Profit and Monopoly in Business

It can be argued that there is no such thing as a firm that is truly a monopoly because a true monopoly exists when there is only one producer of a commodity that has no close substitute. However, it can be said that a monopoly exists when a company dominates a market. The demand curve is downward sloping and the monopoly firm is the price taker. Monopolies are caused by economies of scale (they can create natural monopolies) and a company that controls an essential factor of production. (can create artificial monopolies).

Monopolies that are capable of supernatural profits are not necessarily against the public interest, in fact almost all, if not all, profit-based organizations; try to get the highest profit possible at a given time. that is, it maximizes profit. The fact that monopolies making windfall profits can charge lower prices does not necessarily indicate that they can afford to charge lower prices for goods or services offered to the public.

The perfect competition model and the monopoly model will be used to show how companies make supernatural profits. Topics such as profits and consequences of supernormal profits (short-term and long-term benefits of supernormal profits for a company), types of supernormal profits of companies, concept of supernormal profits in relation to consumer or public interest and the efficiency and the ways in which firms make supernormal profits will be used to explain why monopoly firms are not necessarily against the public interest in the prices they charge for their products.

Supernormal profits are the profits earned above normal profits, i.e. the excess of realized profit over normal profit, while normal profit is the amount of money earned by an organization that is sufficient to cover its expenses and not break. Supernatural gains can be long term or short term. Not all companies make windfall profits in the short term. Companies that make supernatural profits in any market are giving indications that the market is viable and that there is an opportunity to make money. These drive new providers into the market and the theory of demand and supply play a major role in influencing how supernatural gains are eliminated. However, how quickly supernormal gains are eliminated depends on the barriers to entry in the market or industry.

In a situation where there is perfect competition, there is an optimal allocation of resources. Perfect competition is currently considered a theoretical market and is based on some assumptions before it can exist in an industry. These assumptions are that: there should be no barriers to entry, there should be perfect knowledge of the market, there should be a large number of buyers and suppliers who also cannot easily influence the market price, there should be homogeneous goods, and low transportation costs. However, an individual business can still make windfall profits in the short term. This could be the result of a new innovation or a new idea.

These assumptions in perfect competition show that the consumer benefits because average revenue equals marginal revenue equals average total cost, thus only normal profit is made. That is P=MR=AR.

Monopolistic competition, on the other hand, is a situation where there are many small firms producing differentiated products and the price and output decisions of any one firm cannot have an effect on the output and decision of other firms. In monopolistic competition, firms generally charge higher than normal profits because demand is inelastic. This income (higher-than-normal earnings) is siphoned off and usually redistributed to shareholders. This means that if there are supernatural gains, there is also productive and distributive inefficiency. In the short-run equilibrium in monopolistic competition, there may be supernormal profits, but in the long run they quickly disappear due to easy entry into the monopolistic competitive market.

A competitor and a monopolist have one thing in common and that is to maximize profits. They both have similar attributes except that they operate in 2 different market systems. As we can see in the monopoly model, the marginal cost curve is not the same as in the perfect competition model, the demand curve shows the highest possible price that can be charged for a product at a given level of production. . In this way, monopolists can make higher than normal profits by setting the level of production at Marginal Cost equal to Marginal Revenue, i.e. MC = MR and setting the price of the product by choosing the point that intersects the demand curve and the vertical line drawn through the point where MC = SRES.

For a perfect competitor, price will always be equal to marginal revenue, but for a monopolist, price will always be greater than marginal cost. When a monopolist makes a normal profit, it does not necessarily mean that it has to be at the bottom of the average cost curve.

Allocative efficiency is also known as Pareto efficiency and is based on the work of an Italian economist named Vilfredo Pareto. This particular work is called Manuel D’Economie Politique (1909). Allocative efficiency means that it is possible to improve the welfare of one consumer without making another consumer worse off. In other words, resources are efficiently allocated to improve the welfare of one group of consumers without making another group of consumers worse off in the economy.

Productive efficiency means the production of goods and services at minimum cost. This means that it is not possible to produce more of a particular good without producing less of another. This means that there is no waste in the production process.

In monopolistic competition, if both allocative and productive efficiency apply, consumers will be charged less and the monopoly firm will make only a normal profit, but the price charged will be higher than marginal cost. This normal profit can be used to maximize profits or to minimize competition. However, monopolies have their drawbacks, such as distributional inefficiency, price discrimination cartels, artificial shortages, and productive/technological inefficiency.

Monopolistic firms also make windfall profits by further differentiating their products from rival products and this could be through advertisements or simply by changing the product a bit. Another way for monopoly firms to make windfall profits is to have overall cost leadership.

Perfect competition is an ideal model, but it doesn’t really exist, for example stock prices are decided by quasi-competitive markets. There have been criticisms against perfect competition and monopolistic competition. Perfect competition is good for customers because they will get goods at the lowest prices. This appeals to the public interest, while monopoly is considered bad because the goods are identical, produce less, and consumers pay more than they should for the goods and services compared to the perfectly competitive market.

In the case of pharmaceutical companies (mostly monopolies), supernatural profits are needed so that the pharmaceutical firm can spend more on research and development to develop more drugs that help improve lifestyle. Other big companies can also develop new products that could bring more technological advances, pay high salaries to staff, give salary increases and bonuses because of the windfall profits they make.

Shareholders always want high returns at all times and these increasing returns can only come from supernatural profits. An employee in a company that is in a highly competitive market will always be on the edge because he or she could lose their job at any moment, an employee would rather be employed by a company that is doing well rather than a company that is always up to date. edge of the balance point.

In conclusion, it can be seen that monopolies are not necessarily against the public interest because some supernormal profits are used to improve the products that companies make and the public benefits from this research and development, while some goes to shareholders.

Monopolies make windfall profits in the short run, but in the long run they are quickly eliminated by new market entrants due to the easy barrier to entry. Perfect competition is ideal because marginal revenue equals marginal cost, no abnormal profits, just normal profits, but it might deter future developments, while monopolies will always price their products higher than marginal cost because when cost marginal equals marginal revenue, profit is maximized.