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Quick guide to monopoly markets.
Monopoly definition
The only seller of a good or service which does not have a close substitute. |
Narrow definition |
A firm is a monopoly if it can ignore the actions of all other firms. |
Broad definition |
Other firms in the market are not close enough substitutes |
Monopolistic competition
A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products. Difference may be real or artificial. |
Has downward-sloping demand and marginal revenue curves. Small amount of control over price. |
Oligopoly: A market structure in which a small number of interdependent firms compete. |
Every firm that has the ability to affect the price of the good or service it sells will have a marginal revenue curve that is below its demand curve. |
Easy entry and exit to the market |
Highly but not perfectly elastic. |
How monopoloisticaly comp firm maximises profit in the short run |
1. Calculate Profit = (P - ATC) x Q |
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2. Profit is maximised or loss is minimised when MR = MC |
May make money, lose money, or break even. |
Long run |
Entry of new firms |
Demand will go down (left) |
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Will sell fewer products at every price |
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Demand curve will become more elastic |
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Four main reasons monopolies arise
Four reasons for high barriers to entry |
Government blocks the entry of more than one firm into a market. |
By granting a patent or copyright or By granting a firm a public franchise, which makes it the exclusive legal provider of a good or service. |
Control of a key raw material |
Network externalities |
Product usefulness increases with number users |
Natural monopoly |
Economies of scale are so large one firm has a natural monopoly |
Maximise profit in monopolistic competition
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Price and output decision
Max profit is where marginal revenue = marginal cost |
MR = MC |
Like every other firm |
Demand curve = product demand curve |
Price Maker |
With a natural monopoly, the average total cost curve is still falling when it crosses the demand curve |
Monopoly affect on economic efficiency?
Will produce less and charge a higher price than a perfectly competitive industry |
Causes a reduction in consumer surplus |
Causes an increase in producer surplus |
Dauses a deadweight loss (allocative inefficiency) |
Increases market power (ability to charge higher than marginal cost) |
Firms with market power are more likely to earn economic profits, so because R & D requires $$$ they are also more likely to introduce new products |
Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society
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