Monopoly
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9. MONOPOLY
The focus today’s lecture is the examination of how price and output is determined in a monopoly market. Pure monopoly is a single firm producing a product for which there are no close substitutes. It is important for us to understand pure monopoly since this form of economic activity accounts for a large share of output and it provides us with an insight into the more realistic market structure of monopolistic competition and oligopoly. It is characterised by: • a single seller producing a product with no close substitutes. The firm and the industry are the same. The product is unique - there is no close substitute for it. You either buy the product or go without. • effective barriers to entry into the market (legal, technological, economic). These barriers block new firms from entering the industry, blocking potential competition. • the firm is a price maker; faces a downward sloping demand curve for its product (this demand curve is the market demand curve). The firm has considerable control over price since it controls the quantity supplied and can cause price to change by varying the amount supplied. • effective barriers to entry
One special type of monopoly is a natural monopoly, a monopoly that arises because of the existence of economies of scale over the entire relevant range of output and competition is impractical, e.g., water, electricity. These industries are usually given exclusive rights by the government, with the proviso that government regulates the operations to prevent abuses of monopoly power. A larger firm will always be able to produce output at a lower cost than could a smaller firm. The pressure of competition in such an industry would result in a long-run equilibrium in which only a single firm can survive (since the largest firm can produce at a lower cost and can charge a price that is less than the ATC of smaller firms). Natural monopolies have low MC and it is to their advantage to expand
9. MONOPOLY
The focus today’s lecture is the examination of how price and output is determined in a monopoly market. Pure monopoly is a single firm producing a product for which there are no close substitutes. It is important for us to understand pure monopoly since this form of economic activity accounts for a large share of output and it provides us with an insight into the more realistic market structure of monopolistic competition and oligopoly. It is characterised by: • a single seller producing a product with no close substitutes. The firm and the industry are the same. The product is unique - there is no close substitute for it. You either buy the product or go without. • effective barriers to entry into the market (legal, technological, economic). These barriers block new firms from entering the industry, blocking potential competition. • the firm is a price maker; faces a downward sloping demand curve for its product (this demand curve is the market demand curve). The firm has considerable control over price since it controls the quantity supplied and can cause price to change by varying the amount supplied. • effective barriers to entry
One special type of monopoly is a natural monopoly, a monopoly that arises because of the existence of economies of scale over the entire relevant range of output and competition is impractical, e.g., water, electricity. These industries are usually given exclusive rights by the government, with the proviso that government regulates the operations to prevent abuses of monopoly power. A larger firm will always be able to produce output at a lower cost than could a smaller firm. The pressure of competition in such an industry would result in a long-run equilibrium in which only a single firm can survive (since the largest firm can produce at a lower cost and can charge a price that is less than the ATC of smaller firms). Natural monopolies have low MC and it is to their advantage to expand