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Summary Varsity College BCOM Year 1 Economics Ch 11
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Varsity College BCOM Year 1 Economics Ch 11
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PMIC – Economics Ch 11Ch 11 – Market structure 2: monopoly and
imperfect competition
11.1 Monopoly
Monopoly in its pure form = market structure in which Feature Monopoly
there is only one seller of a g/s that has no close Number of One
substitutes, and entry to the market is completely firms
blocked. Nature of Unique product
product with no close
Single seller / firm = monopolist / monopolistic firm substitutes
Entry Completely
The monopolistic firm faces a downward sloping demand blocked
Information Complete
curve and can fix the price at which it sells its product (it
Collusion Irrelevant
can choose the point along the demand curve at which it
Firms control Considerable,
wants to operate). over the price but limited by
of the product market
A monopolist cannot set its sales and its price demand and
independently of each other – a monopolistic firm is the goal of
always constrained by the demand for its product. This profit
demand, however, might be highly price inelastic, thereby maximisation
Demand curve Equals market
creating scope for the monopolist to exploit consumers by
for the firm’s demand curve:
reducing the quantity supplied. product downward
sloping
Most monopolies are near-monopolies. Long-run May be positive
economic profit
We get global, national, regional and local markets. A
monopoly does not require that there be only one supplier of the g/s in the whole
country. A monopoly may pertain to a specific market area.
Barriers to entry for monopoly
1. Natural Monopoly
o A natural monopoly occurs when a single firm can supply the entire market at
a lower cost than multiple firms due to significant economies of scale.
o This situation often arises in industries with high fixed costs, such as
electricity, water, and railways.
o Natural monopolies are usually government-regulated to prevent abuse of
market power.
2. Limited Market Size
3. Exclusive Ownership of Raw Materials
4. Patents (right of use)
5. Licensing (permit to own or operate a business)
6. Sole Rights to Products or Services
7.Import Restrictions
1
, PMIC – Economics Ch 11
8. Strategic Barriers by Established Firms
The equilibrium (profit-maximising) position of a monopolist
monopolistic firms aim to maximise profits.
The monopolistic firm must consider its revenue and cost structures and follow the two
basic rules established in chapter 10.
- Where MR = MC – profit maximising rule
- AR is > AVC in the short run or AR > AC in the long run –
shut down rule
Total, average and marginal revenue under monopoly
Since a monopolist is the only supplier of the specific product, the
demand curve for the product of a monopoly is the market
demand curve for the product of the industry.
Relationship between a monopolists average revenue and its
marginal revenue can be explained with the aid of a numerical
example. This relationship applies to imperfect
competitors as well.
In figure 11 – 1 we show AR and MR. Bc MR is the change in TR
resulting from the sale of an extra unit of output, it applies to the
movement from one unit to the next rather than to a specific unit.
The value of MR is therefore plotted between the two units
concerned rather that against one of them. Clearly shows that MR is
lower than AR at all levels of output.
In figure 11-2 we show the firms total revenue. TR rises, reaches a
max and then falls.
If you compare 11-2 and 11-1:
- as long as MR is positive, TR rises
- When MR = 0, TR reaches Max
- MR is negative, TR falls
2
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