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Monopoly Monopoly: Presented By: Ara Alangcao Presented By: Ara Alangcao

Monopoly refers to a market structure with a single seller of a unique product or service without close substitutes. Key features of a monopoly include single seller, restricted entry, and being a price maker. There are several types of monopolies such as natural, legal, and resource monopolies. Advantages include price stability and economies of scale, while disadvantages are higher prices, price discrimination, and inferior goods. Economies of scale can cause natural monopolies, and a monopoly maximizes profit where marginal revenue equals marginal cost.

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73 views25 pages

Monopoly Monopoly: Presented By: Ara Alangcao Presented By: Ara Alangcao

Monopoly refers to a market structure with a single seller of a unique product or service without close substitutes. Key features of a monopoly include single seller, restricted entry, and being a price maker. There are several types of monopolies such as natural, legal, and resource monopolies. Advantages include price stability and economies of scale, while disadvantages are higher prices, price discrimination, and inferior goods. Economies of scale can cause natural monopolies, and a monopoly maximizes profit where marginal revenue equals marginal cost.

Uploaded by

Tomoyo Adachi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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MONOPOLY

Presented by: Ara Alangcao


DEFINITION

 It refers to the form of market organization in which there is a single


seller of a product without close substitute.
 It characterized by an absence of competition, which often result in
high prices and inferior products.
While a competitive is a price
taker, a monopoly firm is a price
maker.
Features of Monopoly

 Single Seller
 No close substitutes
 Unique product
 Entry restricted
 Price maker
Single Seller

 Under monopoly, there is a single producer of a particular commodity


or service in the market accruing to a rather large number of buyers
Restricted Entry

Free entry of new organizations in this market arrangement is prohibited, that is,
other sellers cannot enter the market of monopoly. Few of the primary barriers,
constricting the entry of new sellers are:
 Government license
 Resource ownership
 Patents and copyrights
 High start-up cost
Price maker

 A monopoly firm is a price maker or price setter because it is the sole


producer of a product. It can exercise considerable influence on the
market supply of the commodity.
No close substitutes

 Goods produced by a monopoly do not have close


substitutes in terms of the consumption of the good.
Unique Product

 A monopoly firm manufactures a commodity that has no close substitute and is a


homogeneous product. With the absence of availability of a substitute, the buyer
is bound to purchase what is available at the tagged price. For instance: there is
no substitute for railways as the 'bulk carrier'. Thus, to be the sole seller, in the
monopolistic setup, a unique product must be produced
TYPES OF MONOPOLY
Natural Monopoly:

 Natural monopolies exist due to economies of scale. As the consequence of the


economies of scale, the monopoly provides the commodity at much lower cost
per unit than potential entrants, discouraging new firms from establishing
themselves in the market.
 Electric companies are an example of a natural monopoly.
Legal Monopoly:

 Legal monopolies exist due to government legislation and protection. Typically,


legal monopolies are privately-owned companies that are granted a monopoly by
the government. The legal monopoly is established to protect consumers’
interests.
 An example of a legal monopoly is local cable television service.
Government Monopoly:

 A government monopoly is a monopoly that’s owned and operated by


government. The primary difference between a government monopoly and a legal
monopoly is that the government monopoly is publicly owned while the legal
monopoly is privately owned.
 Examples of government monopolies include garbage collection in some cities
and public water companies.
Patent Monopoly:

 Protection of an invention under the patent laws results in a patent monopoly.


This protection’s purpose is to encourage research and development by ensuring a
period of time over which the potential for monopoly profit exists. Such
protection, however, is temporary; therefore, patent monopolies have a limited
lifespan as a monopoly. Examples of patent monopolies are numerous, ranging
from Xerox’s patents on components of copying technology to Lego’s patent on
the interlocking feature of plastic toy building blocks
Resource Monopoly:

 A single firm’s virtual control of an entire resource’s supply results in a resource


monopoly.
 The best current example of a resource monopoly is De Beers’s control of
diamonds.
Advantages of Monopoly

 1. Stability of prices
In a monopoly market structure the prices are pretty stable. This is because there is only one firm involved
in the market that sets the prices since there is no competing product. In other types of market structures prices
are not stable and tend to be elastic as a result of the competition.
 2. Economies of Scale
Since there is a single seller in the market it leads to economics of scale because big scale production which
lowers the cost per unit for the seller. The seller may pass this benefit down to the consumer in terms of a lower
price.
 3. Research and Development
Since the monopolist is making abnormal or supernormal profits, the firm can invest that money
into research and development. Customers may get better a quality product at reduced price leading to
enhanced consumer surplus and satisfaction.
Disadvantages of Monopoly

 1. Higher prices
The monopolist could set a very high price for the product leading to exploitation of consumers as they
have no option but to buy it from seller due to the lack of competition in the market.
 2. Price discrimination
Monopolists can sometimes use price discrimination, where they charge different prices on the same
product for different consumers. This depends on market conditions.
 3. Inferior goods and services
The lack of competition may cause the monopoly firm to produce inferior goods and services because they
know the goods will sell.
Economies of Scale as a Cause of Monopoly
Competitive firm vs. Monopoly firms
Demand and Marginal Revenue Curves for a
Monopoly

The demand of a monopoly is down sloping


because the monopoly is the only firm in the
market, and demand for most products is
price
sensitive.

If a monopoly wants to sell more, it must


lower price.
Price falls for all units sold

That’s why MR < D


Profit Maximization for a Monopoly

 A monopoly maximize profit by producing the


quantity at which Marginal Revenue =
Marginal Cost
 It then uses the demand curve to find the price
that will induce consumers to buy that quantity.
Monopolist’s profit

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.
THANK YOU!

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