MONOPOLYBy LISA BRENNAN

A monopoly is an industry in which there is only one producer of the product

What is a monopoly?

An Example of a monopoly:

2010 Q2 2008 Q2 2004 Q1 2000 Q2 1998 Q1

Higher level questions:

2011 Q1 2010 Q1 2008 Q1 2005 Q1 2001 Q1 2000 Q1 1999 Q1

ORDINARY LEVEL QUESTIONS:

Only 1 firm in the industry – they’re a price maker.

The firm aims to maximise profits There are barriers to entry The firm can control either the price charged

or the quantity sold but not both – the demand curve determines the other.

There is perfect knowledge of profit and cost levels.

Assumptions:

2010 HL Q2 (a)

THROUGH LEGISLATION- gov grants 1 firm the sole right to produce a product or service.

MERGERS/ TAKE-OVERS- existing firms in the industry are taken over by 1 firm

ACCESS TO RAW MATERIAL- if a firm has sole access to an important raw material it can gain a monopoly position.

CARTELS- firms agree not to compete in certain geographical areas.

How a monopoly arises/ barriers to entry:

2011 OL Q1 (b), 2010 OL Q1 (b), 2008 OL Q1 (b), 2005 Q1, 2001 Q1

PRODUCT DIFFERENTIATION- a firm can create brand loyalty so that consumers would never switch to any new brand.

ECONOMIES OF SCALE- the larger a firm gets the lower its AC becomes, so when competitors attempt to enter the market the existing firm will lower its price so no one can compete against it.

COPYRIGHTS/ PATENTS- where inventors of a product can legally prevent anyone else from selling it.

NATURAL MONOPOLY- sometimes it’s not possible to survive in business unless you have all or nearly all of the market.2008 HL Q2 (c) and 2004 Q1 (b)

SHORT RUN

Long runEquilibrium• Occurs at point A where• MC = MR and MC is rising and cuts MR from below.2. Price charge & /Output produced• The firm produces output Q1 and sells it at price P1 on the market3. Cost of production• The cost of producing this output shown at point C/D.4. Super Normal Profits.• This firm is earning SNP’s . because AR > AC and• they can continue to earn SNP’s because barriers to entry exist..5. Waste of Scarce Resources• Because the firm is not producing at the lowest point of the AC curve it iswasting scarce resources.

HL 2010 Q2, HL 2008 Q2, HL 2004 Q1, HL 2000 Q1, OL 2010 Q1, 2008 Q1, 2005 Q1, 2001 Q1

Benefit from economies of scale, allowing them to sell products at lower prices.

Large scale production helps avoid wasteful duplication of resources.

They’re less vulnerable to change in the level of demand – therefore employment is more secure.

Advantages of monopoly:

OL 2010 Q1

Doesn’t produce at lowest AC = waste of eco resources

The consumer is exploited (indicated by SNP’s)

Consumers don’t have a choice of products

No incentive to be innovative as there is no competition

Able to practice price discrimination

Disadvantages of monopoly:

Deregulation:

Is allowing more suppliers of a good/ service into the market

Lower Prices.Increased availability of service.Increased efficiency.Loss of essential non-profit making servicesLoss of quality in serviceHigher prices in future

Loss of employment in existing businesses.Job opportunities with new suppliers.Changed working conditions.

Effect of deregulation on:

Consumers:

Employees:

HL 2008 Q2, 2004 Q1

Price discrimination:

Takes place when producer sells the Same product to two or more different Markets at different prices – price Difference isn’t related to any difference In costs in these markets.

HL 2010 Q2, 2008 Q2, 2000 Q2,

Type Explanation1st Degree • A monopolist attempts to remove consumer surplus. • A monopolist identifies those consumers who are prepared to pay a higher price and consequently charges them that higher price. • This type of price discrimination can occur in one-to-one confidential services. E.g. doctors/ solicitor

2nd Degree large quantities are sold at lower prices e.g. bulk buying 3rd Degree • Consumers have different price elasticities of demand. • Consumers with inelastic demand pay a higher price than consumers with elastic demand e.g. cinemas

Some degree of Monopoly power Separation of markets – consumers in 1

market mustn’t be able to transfer the product to those in another

Different consumer price elasticity of demand.

Consumer indifference Consumer ignorance Consumer attitude to the goods

Conditions necessary for price discrimination:

HL 2010 Q2, 2004 Q1, 2000 Q2, 1998 Q1

THANKS FOR WATCHING!