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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
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