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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
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)
Will sell fewer products at every price
Demand curve will become more elastic

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


Price and output decision

Max profit is where marginal revenue = marginal cost
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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