MONOPOLY

QUICK COMPARISON BETWEEN FOUR

MARKETS
Key
characteristics

Perfect
Competition

Monopolistic
Competition

Oligopoly

Monopoly

No. of Sellers

Large number of
sellers

Many sellers

Few sellers

One single seller

Price decision
(Price control)

Price taker
(no control over
P)

Price taker
(little control)

Price maker
(some control)

Price maker
(complete control)

Type of product

Homogenous/
Identical

Slightly
differentiated

Differentiated

Unique

Barriers to Entry

No barriers/ Easy
entry & exit

No barriers/ Easy
entry & exit

Difficult of entry &

exit

Completely
blocked for entry

Type of SR profit

Supernormal/
normal/
subnormal profi

Supernormal/
normal/
subnormal profit

Supernormal/
normal/
subnormal profit

Supernormal/
normal/
subnormal profit

Type of LR profit

Normal profit

Normal profit

Supernormal
profit

Supernormal
profit

Demand curve

Horizontal,
D=MR=AR=P

Downward
sloping (elastic)
P=AR=D>MR

Downward
sloping or kinked
D curve

Downward
sloping (inelastic)
P=AR=D>MR

MONOPOLY

A market structure characterized by a single seller, a

unique product and impossible entry into the market.

CHARACTERISTICS
a)

b)

c)

Single seller with many buyers

One firm provides the total supply of a product in a given
market.
Unique product
It means there are no close substitutes for the
monopolists product.
Firm is price maker
The monopolist firms have a power to control the market
price. However the monopolist can only control price or
quantity but not both.
Can change Qs to change price.

d)

Impossible entry/blocked entry

Among the barriers are:

Ownership of a scarce resources

Legal barriers protecting a firm from potential

competitors. The result of government
regulations and laws, such as licenses, permits,
franchises, patents and copyrights.

Economies of scale As a firm becomes larger,

its cost per unit of output is lower compared to a
smaller competitor. In the long run, cost
advantage forces the smaller firms to leave the
industry.

Financial and technological barriers

Advertising is not important

e)

Sole control of the entire supply of a strategic input

is one way a monopolist can prevent a new
entering in the industry.

Economies of Scale = Natural Monopoly

THE DEMAND OF MONOPOLIST FIRM

Since the monopolist is the only seller in the

market, therefore the monopolists demand is the
industry or market demand.

The monopoly is facing a negative sloping

(downward sloping) demand curve, meaning to
increase QD must reduce price.

PRICE ELASTICITY AND MR

As noted earlier, since the demand curve facing a

monopoly firms is downward sloping, MR < P
MR > 0 when demand is elastic
MR = 0 when demand is unit elastic
MR < 0 when demand is inelastic

Monopoly will never produce

output in the inelastic range of
demand curve because here

P MR but P > MR

-MR ve & therefore profit

=P

Thus, it always charge a

higher price & sell a smaller
quantity.

MONOPOLY PRICE SETTING

There

is a unique profit-maximizing price

and output level for a monopoly firm.
It is optimal to produce at the level of output
at which MR = MC and to charge the price
given by the demand curve at this output
level.
Charging a higher (or lower) price results in
higher (lower) profits.

SHORT-RUN EQUILIBRIUM

A monopolist maximizes profit by producing the

quantity of output where MR = MC.
In short-run, monopolist can earns 3 types of
profits:

Economic profit (Supernormal profit)

Zero economic profit (normal profit)
Economic loss (subnormal profit)

a)

Economic Profit
(Supernormal Profit)
Economic profit is a
situation where TR is
greater than TC.
(TR >TC)
The conditions to
attain economic profit
are

MC = MR
P=AR > ATC.

b)

Normal Profit
Normal profit is a
situation where TR
equals TC. It is also
known as minimum or
zero profit.
The conditions to
attain normal profit
are:

MC = MR and
P=AR = ATC.

c)

Economic Loss
(Subnormal Profit)

A situation where TC
is greater than TR.

The conditions to get

loss are:
MC = MR and
P=AR < ATC.

MONOPOLIST THAT SHUTS DOWN IN THE

SHORT RUN

LONG-RUN EQUILIBRIUM
In long run, a monopolist firm can earns
economic profit.
The main factor is because there is no
competition and more importantly because
of the assumption of barriers to enter the
market.

PRICE DISCRIMINATION

Price discrimination can be defined

as a practice where a monopolist firm
charges different prices to different
customers for similar goods and
services that are not justified by cost
differences.

PRICE DISCRIMINATION
In

imperfectly competitive markets, firms

may increase their profits by engaging in
price discrimination (charging higher
prices to those customers with the most
inelastic demand for the product).
Necessary conditions for price
discrimination:

the firm must not be a price-taker

firms must be able to sort customers by their
elasticity of demand
resale must not be possible

PRICE DISCRIMINATION AND TOTAL REVENUE

TYPES OF PRICE DISCRIMINATION

First degree price discrimination (Perfect price
discrimination)

a)

This type of price discrimination occurs when seller

charges price according to consumers willingness
to pay i.e maximum price consumer willing to pay.
Example: auction

Second degree price discrimination

b)

Different prices are charged for different

blocks.

Examples:

1st 5 units = RM10 charged

2nd 5 units = RM9 charged

Examples are electricity and water

supply, bulk photocopies.

c)

Third degree price discrimination

Charging different prices in different markets

which can be separated either
geographically or conceptually.
Example: air travel

Condition for 3rd Degree Price Discrimination

a)
Seller must be able to separate mkts & resell
of goods are not allowed.
c)

Transport cost must be as low as possible.

c)

Elasticity of demand must be different in

different markets. The monopolist will charge
a higher price when the demand is inelastic
and a lower price when demand is elastic.

EXAMPLE: AIR TRAVEL

COMPARING MONOPOLY AND PERFECT

COMPETITION
- Perfect competition
equilibrium output
Pc : Qc
- optimum output where
SS=DD. Produced at
minimum AC.
- Monopoly equilibrium
output
Pm : Qm.
higher price but less
output

At output Qm : Price Pm > MC

Monopoly does not achieve allocative efficiency.
i.e. underallocation of resources (restrict quantity
to enjoy higher price)

At output Qc : Price Pc = MC
Perfect competition achieve allocative efficiency
since produce at minimum cost

Pm at minimum AC
no productive efficiency

ADVANTAGES OF MONOPOLY
a)

Avoid wastage of resources

b)

Firm enjoys economies of scale

c)

If there are too many firms, wasteful competition

will occur, especially when it involves the use of
scarce resources.
The firm is usually a large one and the firm can
therefore enjoy economies of scale with cheaper
cost.

Stability is ensured

The monopolistic firm is usually established. The

stability of the firm will in turn ensure national
economic stability.

d)

The use of modern and sophisticated

machinery

e)

Research and development

f)

The monopolist firm can afford to buy expensive

machinery and this will ensure efficiency.
The firm can undertake R & D in the form of
innovation and invention.

Price discrimination benefit the poor

The poor will be charged lower price compared to

the rich.

DISADVANTAGES OF MONOPOLY
a)

Undesirable concentration of economic

power

b)

No consumer sovereignty

c)

The monopolist usually charges a higher price

compared to other firms.
The consumers are made powerless and have to
accept whatever goods and services produced by
the monopolist.

Inequality of income

The monopolist can earn economic profit and this

would increase their income, since consumers
have to pay a higher price.

d)

Absence of competition

e)

Allocative inefficiency

f)

The motivation to undertake R & D is almost

absent because there is no rival firm to compete
with.
Consumers have to pay more than the price of
will result in the loss of consumer welfare.

Productive inefficiency

Resources are not fully utilized, i.e production is

carried out at less than the optimum point.