Monopoly lesson 7

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Monopoly lesson 7

  1. 1. [email_address] MONOPOLY
  2. 2. PURE MONOPOLY <ul><li>Pure monopoly is a type of market characterized by; </li></ul><ul><li>a single seller or producer, </li></ul><ul><li>a unique product, with no close substitute, </li></ul><ul><li>the ability of the seller to ask any price it wishes, </li></ul><ul><li>entry to the industry completely blocked by legal, technological or economic barriers, and </li></ul>
  3. 3. <ul><li>no need for non-price actions, except public relations or goodwill advertising. </li></ul><ul><li>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. </li></ul>
  4. 4. MONOPOLY UNIQUE PRODUCT <ul><li>A monopoly exists when a firm is the only producer of a given product. That product is therefore unique to that firm. </li></ul><ul><li>The product is unique in the sense that no close substitutes are presently easily available to consumers. </li></ul><ul><li>- Such situation is rarely observed because products providing a similar service can usually be found in other industries orregions of the world. </li></ul>
  5. 5. MONOPOLY POWER OVER PRICE <ul><li>A monopoly has extensive power over the price it may want to charge its customers. </li></ul><ul><li>The monopolist is sometimes referred to as a price maker. </li></ul><ul><li>A monopolist does not charge the highest possible price. Instead it charges the price for which its profits are the largest. </li></ul><ul><li>A monopolist does not set a price independently of the volume produced: quite the contrary, price setting is implemented by restricting output. </li></ul>
  6. 6. MONOPOLY ENTRY BARRIERS <ul><li>Monopoly exists when entry barriers are present; these may be; </li></ul><ul><li>- 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, </li></ul>
  7. 7. <ul><li>stemming from access to a key resource (such as ore), </li></ul><ul><li>or; </li></ul><ul><li>resulting from unfair tactics or unfair competition. </li></ul>
  8. 8. UNFAIR COMPETITION <ul><li>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. </li></ul><ul><li>They may include; </li></ul><ul><li>drastic under pricing of products, or cornering of a resource market. Most of these tactics have been declared illegal in antitrust legislation. </li></ul>
  9. 9. MONOPOLY NON-PRICE ACTION <ul><li>Since a monopolist is the only firm in the industry, it appears that there is no need for non-price action, such as advertising. </li></ul><ul><li>However, advertising and other non-price action are used as a form of public relations and for the purpose of avoiding customer antagonism. </li></ul>
  10. 10. MONOPOLY DEMAND <ul><li>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. </li></ul>
  11. 12. MONOPOLY MARGINAL REVENUE <ul><li>Marginal revenue is the additional revenue received for the last unit sold. </li></ul><ul><li>- 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. </li></ul><ul><li>- 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. </li></ul>
  12. 13. MONOPOLY DEMAND ELASTICITY <ul><li>The upper portion of the demand curve of a monopoly is elastic, and marginal revenue is positive for this region of output. </li></ul><ul><li>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. </li></ul>
  13. 14. MONOPOLY PROFIT <ul><li>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). </li></ul><ul><li>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). </li></ul>
  14. 15. MONOPOLY OPTIMUM QUANTITY <ul><li>The profit of a monopoly is determined by first finding the optimum quantity with the marginal revenue equal to marginal cost rule. </li></ul><ul><li>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. </li></ul>
  15. 16. Monopoly Profit Graph
  16. 17. <ul><li>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. </li></ul>
  17. 18. MONOPOLY LOSS <ul><li>A monopoly seeks to maximize profits, and is capable of achieving such a goal by controlling price and quantity. </li></ul><ul><li>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. </li></ul>
  18. 19. Monopoly Loss Graph
  19. 20. MONOPOLY ECONOMIC EFFECT <ul><li>A monopoly form of market is highly undesirable for our society because of the sizable loss of productive and allocative efficiency: </li></ul><ul><li>the price paid is higher than in perfect competition and the quantity is smaller. </li></ul><ul><li>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. </li></ul>
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