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JENNIE HARRINGTON
Monopoly
Monopoly Assumptions
One firm is the industry One firm exists within the industry so there is no distinction
between the firm and the industry. Controls price or output
A firm can control price or output but not both If it sets the price, the output produced will be determined by
consumers If it sets the output the price will be determined by the market
Profit maximisation It is possible for the firm to earn SNP’s in both the short run
and the long runBarriers to entry
If a monopoly market structure is to continue into existence into the long run there cannot be freedom of entry and exit.
Relationship between AR and MR
Quantity AR TR MR
1 €10 €10 -
2 €9 €18 €8
3 €8 €24 €6
4 €7 €28 €4
5 €6 €30 €2
The relationship between AR & MR
MRAR
P
Q
There is no distinction b/w The firm and the industry as thereIs only one firm in the industry.In order to sell more of its productsThe firm will have to decrease itsAR. MR decreases at a faster rateThan AR and it is less than AR
Long Run Equilibrium
AC
Long Run Equilibrium for a firm in Monopoly
Equilibrium Occurs at pt _, where MC = MR, MC is rising
Price/ Output The firm produces Q1 and sells it at P1
Profits AR>AC, SNP’s are being earned in the box _______.
They can continue to exist due to barriers to entry
Costs The cost of producing the output is shown at pt __. The
firm is not producing at the lowest point on the AC curve. Hence, the firm is wasting scarce resources/ inefficiency
Barriers to entry
Legal/ Statutory Monopoly Other firms may not be allowed into the industry because the
government confers on a firm the sole right to supply a particular good or service I.e. Aer Rianta
Ownership of a patent/ copyright If a firm has the sole right to a manufacturing process then no
other firm can compete with it. Other firms are not allowed to use this patent until the time period has expired
Sole right to raw materials/ Natural monopolies A firm may have complete control over the source of essential raw
materials I.e. an oil drilling company Large capital investment
In some industries the minimum size of a firm required to operate efficiently is so large that there is no room for competitors once one firm has established itself.
Trade agreements/ collusion – cartels By entering trade agreements with other firms, a firm can share
out the market so that no competition exists within its segment of the market
Mergers/ takeovers A firm may ensure their survival by merging/ taking over other
(rival) firms in the same line of business – such that it becomes a monopolist and no competition exists within the industry
Monopolies based on fear, force or threats An individual/ firm may stop other individuals/ firms providing
similar goods/ services by threats/ force instilling fear into potential entrants I.e. the supply of illegal drugs
Brand proliferation A firm may gain monopoly power if through its advertising
consumers are convinced that there is no suitable alternative to their particular brands
Advantages of Monopoly
Economies of scale Production on a large scale may help the firm benefit from
economies of scale and these cost savings may be passed on to the consumer in the form of ______________
Employment may be more secure with monopoly. A monopolist may be less
vulnerable to changes in the level of demand in the market as it earns SNP’s., Also employees may benefit ________________________________________________________________________________________________________
Guarantee supply of product/ service The supply of a product may be guaranteed and provided where
profit is minimal so consumers benefit e.g. _____________________________
Reduced use of scarce resources ___________________________________________________
Potential for innovation ____________________________________________________
Disadvantages of Monopoly
Cost: the monopolist will seldom produce at the__________ point on the
AC curveProfits:
___________ are being earned indicating that the consumer is being exploited (AR> AC)
Consumer has no ______– as there are no other producers of the product
A monopolist may be able to practice price discrimination Where a good is sold to different consumers at different prices
where the price difference is not due to difference in the cost of production
Monopolists can control either the_______ it sells at or the __________ it will supply. The monopolist will usually cut its production level to increase the price of the good, thus under utilising its resources
Make suggestions as to how semi-state companies which are monopolists can be made
more cost effective
Avoid any gov. interference in the day to day running of the company.
Introduce competition in that particular industry by introducing deregulation. Competition normally encourages cost efficiency.
Introduce a profit motive for the mgt team. Appoint experienced entrepreneurs and highly
qualified people as members of the BOD. This replaces people being appointed solely for their allegiance to a particular political party and who may not have any business experience/ knowledge.
Comparing LR Perfect Competition and Monopoly
Price/ Output PC M
Profits PC M
Cost PC M
Do consumers fare better if a product is produced under conditions of monopoly or
PC – explain..
Profit
Price
Cost
Are employees better off working in a perfectly competitive industry or in a
monopolistic industry?