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TOPIC 8: MONOPOLY, MONOPOLISTIC AND OLIGOPOLY

TOPIC 8: MONOPOLY, MONOPOLISTIC AND OLIGOPOLY
Introduction
Apart from perfect market competition, we will look at three other types of market structure, namely monopoly, monopolistic and oligopoly in this topic. We will also compare between the characteristics of the market structure. In this topic, the emphasis will be on monopoly, while the other two structures

will be discussed briefly.

Learning Objectives
At the end of this topic, you should be able to: 1. outline the charcateristics of monopoly, monopolistic and oligopoly; 2. draw the demand curve for the monopoly, 3. explain how monopoly achieves market equilibrium in the short run; 4. analyse the different profit situations encountered by the monopolist;

and; 5. discuss the characteristics of monopolistic and oligopoly.

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TOPIC 8: MONOPOLY, MONOPOLISTIC AND OLIGOPOLY

8.1 Monopoly
Monopoly is an industry that has only one firm that sells a good which has no close substitutes. Monopoly firms also represent industries because there are no other firms in the market. Therefore, the demand curve for the firm’s production is the same as the markets demand curve that slopes to the

bottom from the left to the right.

8.1.2 Characteristics of a Monopolist
(a) (b) There is only one firm in the market (single seller/producer) and there are many buyers. The firm is in control of the whole market whether it is from the angle of determining the price or the quantity of production. A monopolist has the power to determine the level of price because there is no competition from other firms. Therefore, if the monopolist intends to sell a bigger quantity, it has to reduce the price. This means that the monopolist can only control the price or the quantity of sales, and not both at once. Goods have no substitutes. Consumers have no choice other than what is produced by the monopolist. All competitors are prevented from entering the market. It is difficult for other firms to enter the market because there are barriers and hindrances such as: (i) The need for large amounts of capital to produce products as a

(c) (d)

(ii)
(iii)

result of a need for technology and high costs. The Ownership Act -The monopolist owns a patent that prohibits firms from copying or producing the same good. The government gives exclusive privileges to a monopolist to

carry on the production activities. (e) No need for advertising. A monopolist does not need to advertise to increase sales. This is because it has control of the market and consumers have no choice but to buy from that one producer. Examples of as monopolies in Malaysia: (i) The National Electricity Board (Tenaga Nasional Berhad) which

supplies electricity in Peninsula Malaysia. (ii) Flight services to local destinations by Malaysia Airlines, MAS.

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TOPIC 8: MONOPOLY, MONOPOLISTIC AND OLIGOPOLY

Other than the above examples, what other examples of monopolists in Malaysia do you know of?

8.1.2 Demand Curve and Monopoly Revenue
As discussed, monopolists have the power to control the quantity of output produced or prices. However, if a monopolist wants to sell at a higher quantity,

it needs to reduce the price level.

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TOPIC 8: MONOPOLY, MONOPOLISTIC AND OLIGOPOLY

Table 8.1: Total Revenue, Average Revenue and Marginal Revenue Quantity (Q) 1 2 3 4 5 6 7 8 9 10 Price Total Revenue (P) (RM) 10 9 8 7 6 5 4 3 2 1 (TR) (RM) 10 18 24 28 30 30 28 24 18 10 Average Marginal Revenue Revenue (AR) (MR) (RM) (RM) 10 9 8 7 6 5 4 3 2 1 10 8 6 4 2 0 – 2 – 4 – 6 –8

In Table 8.1 above, the quantity produced that is sold by the monopolist gradually rises when the price gradually falls. The relationship between the

quantity produced and the price producers the demand curve. Total Revenue (TR) = P . Q Average Revenue (AR) = Marginal Revenue (MR) =

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TOPIC 8: MONOPOLY, MONOPOLISTIC AND OLIGOPOLY...
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