MONOPOLY By LISA BRENNAN What is a monopoly
MONOPOLY By LISA BRENNAN
What is a monopoly? A monopoly is an industry in which there is only one producer of the product
An Example of a monopoly:
Higher level questions: 2010 Q 2 2008 Q 2 2004 Q 1 2000 Q 2 1998 Q 1
ORDINARY LEVEL QUESTIONS: 2011 Q 1 2010 Q 1 2008 Q 1 2005 Q 1 2001 Q 1 2000 Q 1 1999 Q 1
Assumptions: 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. 2010 HL Q 2 (a)
How a monopoly arises/ barriers to entry: 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. 2011 OL Q 1 (b), 2010 OL Q 1 (b), 2008 OL Q 1 (b), 2005 Q 1, 2001 Q 1
v. PRODUCT DIFFERENTIATION- a firm can create brand loyalty so that consumers would never switch to any new brand. v. 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. v. COPYRIGHTS/ PATENTS- where inventors of a product can legally prevent anyone else from selling it. v. NATURAL MONOPOLY- sometimes it’s not possible to survive in business unless you have all or nearly all of the market. 2008 HL Q 2 (c) and 2004 Q 1 (b)
SHORT RUN
Long run HL 2010 Q 2, HL 2008 Q 2, HL 2004 Q 1, HL 2000 Q 1, OL 2010 Q 1, 2008 Q 1, 2005 Q 1, 2001 Q 1 Equilibrium • 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 Q 1 and sells it at price P 1 on the market 3. 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 is wasting scarce resources.
Advantages of monopoly: 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. OL 2010 Q 1
Disadvantages of monopoly: 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
Deregulation: Is allowing more suppliers of a good/ service into the market
Effect of deregulation on: Consumers: Lower Prices. Increased availability of service. Increased efficiency. Loss of essential non-profit making services Loss of quality in service Higher prices in future Employees: Loss of employment in existing businesses. Job opportunities with new suppliers. Changed working conditions. HL 2008 Q 2, 2004 Q 1
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 Q 2, 2008 Q 2, 2000 Q 2,
Type 1 st Degree Explanation • 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 2 nd Degree buying large quantities are sold at lower prices e. g. bulk 3 rd Degree • Consumers have different price elasticities of demand. • Consumers with inelastic demand pay a higher price than consumers with elastic demand e. g. cinemas
Conditions necessary for price discrimination: 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 HL 2010 Q 2, 2004 Q 1, 2000 Q 2, 1998 Q 1
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