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Monopoly Market Structure
The document discusses imperfect competition, focusing on monopoly as a market structure where a single producer controls the price of a product with no close substitutes. It outlines the characteristics of monopolies, barriers to entry, types of monopolies, and the equilibrium conditions under which these firms operate in both the short run and long run. The analysis includes how monopolies can achieve profit maximization and the implications of government regulation and market dynamics.
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Introduction to Imperfect Competition; focus on Monopoly as a market structure with single sellers.
Monopoly characteristics include single seller and price maker; barriers include natural, firm actions and government.
Economies of scale favor large producers; government actions like patents create legal monopolies.
Various monopolies: Natural, Local, Bilateral, Regulated; Monopolization attempts described.
Equilibrium analysis under monopoly using demand and marginal cost concepts illustrated with graphs.
Short-run profit scenarios including profit-maximizing, normal profit, and loss-minimizing conditions.
Long-run equilibrium for monopolies ensuring economic profit, stability against new entry.
End of presentation with thanks and closing remarks.
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Monopoly Market Structure
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- 2. Imperfect CompetitionAn imperfectlycompetitive industry is an industry in which single firms have some control over the price of their output.Some examples are Monopoly, Oligopoly and Monopolistic competition.Monopoly:- A market structure in which only one producer or seller exists for a product that has no close substitutes12/9/20092continued...
- 3. The characteristics ofMonopoly areSingle Seller
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- 9. MONOPOLYMonopolies exist becauseof barriers to entry into a market that prevent competition. ex:-railways, electricity.There are three general classes of barriers to entry(CAUSE):Natural barriers, the most common being economies of scaleActions by firms to keep other firms outGovernment (legal) barriers12/9/20094continued...
- 10. Economies of ScaleInsome industries, the larger the scale of production, the lower the costs of production.Entrants are not usually able to enter the market assured of or capable of a very large volume of production and sales.This gives incumbent firms a significant advantage.Examples are electric power companies and other similar utility providers.12/9/20095continued...
- 11. GovernmentGovernments often providebarriers, creating monopolies.As incentives to innovation, governments often grant patents, providing firms with legal monopolies on their products or the use of their inventions or discoveries for a period of 17 years. 12/9/20096continued...
- 12. Types of MonopoliesNaturalmonopoly: A monopoly that arises from economies of scale. The economies of scale arise from natural supply and demand conditions, and not from government actions.Local monopoly: a monopoly that exists in a limited geographic area.Bilateral Monopoly: only one buyer, very rare ex; expensive defence goods-govt.is single buyer.Regulated monopoly: a monopoly firm whose behavior is overseen by a government entity.Monopolization: an attempt by a firm to dominate a market or become a monopoly.12/9/20097continued...
- 13. Monopoly: EquilibriumPy =QDemandMR12/9/20098continued...
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- 16. Monopoly: EquilibriumMCOutput DecisionMC= MRPACymyDemandMR12/9/200911continued...
- 17. Monopoly: EquilibriumMCPm =the pricePACPmymyDemandMR12/9/200912continued...
- 18. Monopoly: EquilibriumFirm =MarketShort run equilibrium diagram = long run equilibrium diagram (apart from shape of cost curves)At qm: pm > AC therefore you have excess (abnormal, supernormal) profitsShort run losses are also possible12/9/200913continued...
- 19. Monopoly: EquilibriumMCThe shadedarea is the excess profitPACPmymyDemandMR12/9/200914continued...
- 20. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN SHORT RUNPROFIT-MAXIMIZING CASE:A firm in the short run earns maximum profit when it meets the following conditions;MR = MC and MC curve cuts MR from belowAverage Revenue is greater than Average Total Cost.12/9/200915continued...
- 21. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN SHORT RUNPROFIT-MAXIMIZING CASE:MCRevenue/CostATCPProfitAVCEARMR0Output12/9/200916continued...
- 22. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN SHORT RUNNORMAL PROFIT CASE:A firm in the short run earns normal profit when it meets the following conditions;MR = MC and MC curve cuts MR from belowAverage Revenue is equal to Average Total Cost.12/9/200917continued...
- 23. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN SHORT RUN NORMALPROFIT CASE:MCRevenue/CostATCPAVCEARMR0Output12/9/200918continued...
- 24. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN SHORT RUNLOSS-MINIMIZING CASE:A firm in the short run minimize loss in following way;MR = MC and MC curve cuts MR from belowAverage Revenue is less than Average Total Cost but greater than AVC.12/9/200919continued...
- 25. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN SHORT RUN LOSS-MINIMIZING CASE:MCRevenue/CostATCLossPAVCEARMR0Output12/9/200920continued...
- 26. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN LONG RUNA monopoly firm will be in equilibrium in long run and will earn Economic profit if;MC = MR and MC cuts MR curve from belowAR is greater than Average Cost and There is no threat of new entry into the marketIf there is threat of new entry so monopolist will reduce prices and will earn only normal profit.12/9/200921continued...
- 27. EQUILIBRIUM PRICE ANDOUTPUT UNDER MONOPOLY IN LONG RUNMCRevenue/CostATCPProfitAVCEARMR0Output12/9/200922continued...
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