HAT Manifesto Part 1/3 - Rubric Cube - 250406 edit

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 15 of 32 - Monopoly

Section 19 of 34

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Per Figure A, a town has only one monopoly firm supplying water.

Marginal cost of pumping an additional (marginal) gallon of water is constant at $1 per gallon.

The profit-maximizing firm chooses to charge a price $6 per gallon and supply 5 total gallons of water, where marginal revenue = marginal cost.

Here total profit is maximized at $25

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Marginal cost of pumping water would be constant at $1 per gallon for other suppliers of water.

Because of competition driving down the price all firms would eventually be forced to charge a price of $1 per gallon.

End result would be a total of 10 gallons supplied and only a normal profit earned and no economic profit for any of the firms.

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In a monopoly situation a benevolent social planner would

· choose the competitive low price and high output quantity where the marginal cost and demand curves meet

· rather than the monopoly high price and low output quantity where the marginal cost and marginal revenue curves meet

Per Figure A, at competitive price and quantity

· monopoly firm’s profit A+B is eliminated, resulting only normal profit with no economic profit

· deadweight loss area C is eliminated and is added to total surplus

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Normal profit is the cost amount + just enough to stay in the business, typically about 7%.

If owners do not make at least a normal profit of typically 7% they will get out of the current business and put their money into the stock market or another business venture.

Since in a competitive market the price is set by the market not the producing firms, firms continuously try to develop ways to reduce production costs in hope of earning economic profit.

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What is the typical normal profit of U.S. firms?

ChatGPT:

Normal profit is the minimum profit necessary for a firm to stay in business — it's the opportunity cost of investment capital, i.e., what the owners could earn elsewhere with similar risk.

In the U.S. typical normal profit margins vary by industry, but a rough estimate for the overall economy is 4% to 10% on the investment amount.

If it earns above normal profit it's making economic profit.

If it's below, it's underperforming and will exit the market if there is no expectation of soon earning at least a normal profit.

Examples by industry:

Industry >>> Normal Profit Range

Public utilities >>> 4–6%

Retail >>> 6–8%

Manufacturing >>> 7–9%

Technology >>> 10–15% (higher risk/reward)

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public utilities, manufacturing, retail

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