1) Explain the terms ‘Monopoly’ and ‘Monopolistic Competition’ (4 marks)
A monopoly is a market structure in which a single company or individual owns all or nearly all of the market for a given type of product or service with no or close substitute. This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale, barriers to entry, or governmental regulation). Such a firm is referred to as a monopolist.
Monopolistic competition is a type of imperfect competition such that competing producers sell products that are differentiated from one another as good but not perfect substitutes (such as from branding, quality, or location). In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms, this means that they can each set their own prices and quantity without affecting the market place as a whole.
2) State two features of (a) Monopoly (b) Monopolistic Competition
|Features of a Monopoly |Features of Monopolistic Competition | |There are no close substitutes for the product. |There is proud differentiation in products. | |A single seller has complete control over the supply of the commodity.|There is more than one seller of the supply of the commodity. |
3) Draw the diagram representing the monopoly market structure.
Green area = Supernormal Profit (AR-AC) Q
❖ Pink area = Deadweight welfare loss (combined loss of producer and consumer surplus) compared to competitive market
❖ Higher Prices Higher Price and Lower Output than under Perfect Competition. This leads to a decline in consumer surplus and a deadweight welfare loss...
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