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Monopoly lesson 7
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  • 1. [email_address] MONOPOLY
  • 2. PURE MONOPOLY
    • Pure monopoly is a type of market characterized by;
    • a single seller or producer,
    • a unique product, with no close substitute,
    • the ability of the seller to ask any price it wishes,
    • entry to the industry completely blocked by legal, technological or economic barriers, and
  • 3.
    • no need for non-price actions, except public relations or goodwill advertising.
    • Examples of pure monopolies are not common because monopolies are either usually regulated or prohibited altogether. Cases where a company has substantial amount of monopoly power, but cannot be considered a pure monopoly, can easily be found.
  • 4. MONOPOLY UNIQUE PRODUCT
    • A monopoly exists when a firm is the only producer of a given product. That product is therefore unique to that firm.
    • The product is unique in the sense that no close substitutes are presently easily available to consumers.
    • - Such situation is rarely observed because products providing a similar service can usually be found in other industries orregions of the world.
  • 5. MONOPOLY POWER OVER PRICE
    • A monopoly has extensive power over the price it may want to charge its customers.
    • The monopolist is sometimes referred to as a price maker.
    • A monopolist does not charge the highest possible price. Instead it charges the price for which its profits are the largest.
    • A monopolist does not set a price independently of the volume produced: quite the contrary, price setting is implemented by restricting output.
  • 6. MONOPOLY ENTRY BARRIERS
    • Monopoly exists when entry barriers are present; these may be;
    • - legal, from the ownership of a patent or a copyright, - legal, from its appointment as public utility for natural monopolies, - technological, from a secret method of production, - due to large size, age, or good reputation,
  • 7.
    • stemming from access to a key resource (such as ore),
    • or;
    • resulting from unfair tactics or unfair competition.
  • 8. UNFAIR COMPETITION
    • Various strategies used by firms to eliminate competitors by forcing them into bankruptcy or preventing new firms from entering the industry, are referred to as unfair competition.
    • They may include;
    • drastic under pricing of products, or cornering of a resource market. Most of these tactics have been declared illegal in antitrust legislation.
  • 9. MONOPOLY NON-PRICE ACTION
    • Since a monopolist is the only firm in the industry, it appears that there is no need for non-price action, such as advertising.
    • However, advertising and other non-price action are used as a form of public relations and for the purpose of avoiding customer antagonism.
  • 10. MONOPOLY DEMAND
    • The demand of a monopoly is downward sloping because the monopoly is the only firm in the market, and demand for most products is price sensitive.
  • 11.  
  • 12. MONOPOLY MARGINAL REVENUE
    • Marginal revenue is the additional revenue received for the last unit sold.
    • - Since the monopolist can sell one more unit only by lowering the price on all the units sold, the marginal or additional revenue is not constant but decreasing.
    • - The marginal revenue is less than price at any quantity. If the demand curve is a straight line, the slope of marginal revenue is twice the slope of the demand curve.
  • 13. MONOPOLY DEMAND ELASTICITY
    • The upper portion of the demand curve of a monopoly is elastic, and marginal revenue is positive for this region of output.
    • The lower portion of demand is inelastic, and marginal revenue is negative in that region. It follows that a monopolist would never want to be in the inelastic portion of its demand since it can increase revenues by raising price.
  • 14. MONOPOLY PROFIT
    • A monopoly finds its maximum profit by producing at a level of output where marginal revenue equals marginal cost. (i.e. the intersection of marginal revenue and marginal cost curves).
    • If it produces one less unit a profit is foregone (on the last unit it failed to sell), and if it produces one more unit a decrease in profit is incurred (as the marginal cost exceeds the marginal revenue for that last unit).
  • 15. MONOPOLY OPTIMUM QUANTITY
    • The profit of a monopoly is determined by first finding the optimum quantity with the marginal revenue equal to marginal cost rule.
    • After that, the unit price on the demand curve and the unit cost on the average total cost curve are found based on the optimum quantity established first.
  • 16. Monopoly Profit Graph
  • 17.
    • The monopoly profit is the difference between total revenue and total cost. Total revenue is represented as a rectangle with price (on the demand curve) as its height, and quantity (determined by MR=MC) as it width. Total cost is a rectangle with average unit cost (on average total cost) as its height, and quantity as its width. The area by which total revenue exceeds total cost is the profit area.
  • 18. MONOPOLY LOSS
    • A monopoly seeks to maximize profits, and is capable of achieving such a goal by controlling price and quantity.
    • However, should customer demand decrease significantly, the monopolist will be content with minimizing loss (in the shortrun) and may even be forced to close down.
  • 19. Monopoly Loss Graph
  • 20. MONOPOLY ECONOMIC EFFECT
    • A monopoly form of market is highly undesirable for our society because of the sizable loss of productive and allocative efficiency:
    • the price paid is higher than in perfect competition and the quantity is smaller.
    • The monopoly underutilizes the resources for the production of a good wanted by society. The price charged is much higher than the cost of additional resources used. However, economies of scale and technological progress are possible.
  • 21. ?