Monopoly Assumptions One firm is the industry One firm exists within the industry so there is no distinction between the firm and the industry. Controls price or output A firm can control price or output but not both If it sets the price, the output produced will be determined by consumers If it sets the output the price will be determined by the market Profit maximisation It is possible for the firm to earn SNP’s in both the short run and the long run Barriers to entry If a monopoly market structure is to continue into existence into the long run there cannot be freedom of entry and exit.
Relationship between AR and MRQuantity AR TR MR1 €10 €10 -2 €9 €18 €83 €8 €24 €64 €7 €28 €45 €6 €30 €2
The relationship between AR & MRP There is no distinction b/w The firm and the industry as there Is only one firm in the industry. In order to sell more of its product The firm will have to decrease its AR. MR decreases at a faster rate Than AR and it is less than AR AR MR Q
Long Run Equilibrium for a firm in Monopoly Equilibrium Occurs at pt _, where MC = MR, MC is rising Price/ Output The firm produces Q1 and sells it at P1 Profits AR>AC, SNP’s are being earned in the box _______. They can continue to exist due to barriers to entry Costs The cost of producing the output is shown at pt __. The firm is not producing at the lowest point on the AC curve. Hence, the firm is wasting scarce resources/ inefficiency
Barriers to entry Legal/ Statutory Monopoly Other firms may not be allowed into the industry because the government confers on a firm the sole right to supply a particular good or service I.e. Aer Rianta Ownership of a patent/ copyright If a firm has the sole right to a manufacturing process then no other firm can compete with it. Other firms are not allowed to use this patent until the time period has expired Sole right to raw materials/ Natural monopolies A firm may have complete control over the source of essential raw materials I.e. an oil drilling company Large capital investment In some industries the minimum size of a firm required to operate efficiently is so large that there is no room for competitors once one firm has established itself.
Trade agreements/ collusion – cartels By entering trade agreements with other firms, a firm can share out the market so that no competition exists within its segment of the market Mergers/ takeovers A firm may ensure their survival by merging/ taking over other (rival) firms in the same line of business – such that it becomes a monopolist and no competition exists within the industry Monopolies based on fear, force or threats An individual/ firm may stop other individuals/ firms providing similar goods/ services by threats/ force instilling fear into potential entrants I.e. the supply of illegal drugs Brand proliferation A firm may gain monopoly power if through its advertising consumers are convinced that there is no suitable alternative to their particular brands
Advantages of Monopoly Economies of scale Production on a large scale may help the firm benefit from economies of scale and these cost savings may be passed on to the consumer in the form of ______________ Employment may be more secure with monopoly. A monopolist may be less vulnerable to changes in the level of demand in the market as it earns SNP’s., Also employees may benefit _____________________________________________________ ___________________________________________________ Guarantee supply of product/ service The supply of a product may be guaranteed and provided where profit is minimal so consumers benefit e.g. _____________________________ Reduced use of scarce resources ___________________________________________________ Potential for innovation ____________________________________________________
Disadvantages of Monopoly Cost: the monopolist will seldom produce at the__________ point on the AC curve Profits: ___________ are being earned indicating that the consumer is being exploited (AR> AC) Consumer has no ______– as there are no other producers of the product A monopolist may be able to practice price discrimination Where a good is sold to different consumers at different prices where the price difference is not due to difference in the cost of production Monopolists can control either the_______ it sells at or the __________ it will supply. The monopolist will usually cut its production level to increase the price of the good, thus under utilising its resources
Make suggestions as to how semi-state companieswhich are monopolists can be made more cost effective Avoid any gov. interference in the day to day running of the company. Introduce competition in that particular industry by introducing deregulation. Competition normally encourages cost efficiency. Introduce a profit motive for the mgt team. Appoint experienced entrepreneurs and highly qualified people as members of the BOD. This replaces people being appointed solely for their allegiance to a particular political party and who may not have any business experience/ knowledge.
Comparing LR Perfect Competition and Monopoly Price/ Output PC M Profits PC M Cost PC M
Do consumers fare better if a product is produced under conditions of monopoly or PC – explain..ProfitPriceCost
Are employees better off working in a perfectlycompetitive industry or in a monopolistic industry?
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