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 Q2 2008 Q2 2004 Q1 2000 Q2 1998 Q1 ORDINARY LEVEL QUESTIONS: 2011 Q1 2010 Q1 2008 Q1 2005 Q1 2001 Q1 2000 Q1 1999 Q1 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 Q2 (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 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 run HL 2010 Q2, HL 2008 Q2, HL 2004 Q1, HL 2000 Q1, OL 2010 Q1, 2008 Q1, 2005 Q1, 2001 Q1 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 Q1 and sells it at price P1 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 Q1 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 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 1st Degree surplus. Explanation • A monopolist attempts to remove consumer • 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 buying large quantities are sold at lower prices e.g. bulk 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 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 Q2, 2004 Q1, 2000 Q2, 1998 Q1 THANKS FOR WATCHING!