ECONOMICS

GRADE 12
MAIN TOPIC: MICROECONOMICS

TOPIC: IMPERFECT MARKETS:

MONOPOLY

BY: MR MHLONGO TS
 LESSON OBJECTIVES
This lesson will improve learners’ understanding of the following
topics:
1. Types and examples of monopoly
2. Characteristics of monopoly.
3. Monopoly costs and revenues.
4. Equilibrium positions for the monopolist firm.
 PRE-KNOWLEDGE
Learners are already informed about the following topics on
markets:
• Characteristics of monopoly
• Types of monopoly
IMPERFECT MARKETS
 IMPERFECT MARKETS
• Imperfect markets do not meet the basic standards of a hypothetical
perfectly or purely competitive market.
• Imperfect markets are characterized by having competition for market
share, high barriers to entry and exit, different or unique products and
services, as well as a small number of buyers and sellers.
• Market structures that are categorized as imperfect include monopolies,
oligopolies, and monopolistic competition.
 IMPERFECT MARKET STRUCTURES
• Monopoly is the imperfect market structure at which only one seller exist
to supply a unique product for the entire market.
• Oligopoly is the imperfect market structure that exist when few large firms
exist to produce either homogenous or differentiated products.
• Monopolistic competition is the imperfect market structure that exist
when many buyers and sellers exist with each of sellers having a control
over the price.
 IMPERFECT MARKETS

HOW DO IMPERFECT MARKET STRUCTURES AFFECT CONSUMER

AND ECONOMIC WELFARE?
 SOCIAL EFFECTS OF IMPERFECT MARKETS
• Control over the price results to consumer exploitation to higher prices.
• This decreases social welfare and increase the level of poverty to the
marginalised.
• Less or minimum consumer choice compromises social welfare.
• Barriers to entry and less market competition decreases efficiency,
innovation and quality of goods and services.
• Imperfect markets information results in buyers making improper economic
decisions and make market less accessible to new entrants.
• Collusive behaviour by oligopolies through illegal mergers
and price fixing limit competition and compromise
consumer freedom of choice.
 ECONOMIC EFFECTS OF IMPERFECT MARKETS
• Market share competition results to anti-competitive practices by some
businesses to win consumer interest.
• Less output size by monopolies and oligopolies prevent opportunities for
employment, international competitiveness and economic growth.
• Government intervention in monopolies prevents economic efficiency and
foreign investments.
 MONOPOLY
• A monopoly exists when there is only one seller of a unique product who
supply the entire market.
• The monopoly market is not accessible to new firms, the market entry is
completely blocked.
• The monopolist firm makes supernormal profit in both short-run and long
run if its average revenues exceed average costs.
• It however does make economic loss if its average cost exceed its
average revenues or total costs exceed total revenues.
• The product or a service produced by a monopoly firm does not have any
perfect substitute.
EXAMPLES OF MONOPOLY IN SA
De Beers
diamond
selling
organisation
South
Transnet African
Breweries

Denel Eskom
 TYPES OF MONOPOLY
NATURAL
MONOPOLY

LOCAL
MONOPOLY

ARTIFICIAL
MONOPOLY
 NATURAL MONOPOLY
• A natural monopoly is a type of monopoly that exists typically due to the
high start-up costs or powerful economies of scale of conducting a
business in a specific industry which can result in significant barriers to
entry for potential competitors.
• Natural monopolies are allowed when a single firm can supply a product or
service at a lower cost than any potential competitor but are often heavily
regulated to protect consumers.
• A company with a natural monopoly is the only provider of a product or
service in an industry.
 NATURAL MONOPOLY CONTINUES
• Natural monopolies can also arise when one firm is much more efficient
than multiple firms in providing the good or service to the market.
• A good example of this is in the business of electricity transmission where
once a grid is set up to deliver electric power to country.
• Eskom is the best example of natural monopoly in South Africa.
 NATURAL MONOPOLY FORMATION
• Firstly, it occurs when a company takes advantage of an industry's high
barriers to entry to create a "moat", or protective wall, around its business
operations.
• High barriers to entry are often due to the significant amount of capital
needed to purchase fixed assets a company needs to operate.
• Secondly, it occurs where producing at a large scale is so much more
efficient than small-scale production, that a single large producer is
sufficient to satisfy all available market demand.
• Because their costs are higher, small-scale producers cannot simply
compete with the larger, lower-cost producer within the market.
 ARTIFICIAL MONOPOLY
• Artificial monopoly exist when obstacles to the entry of other firms are not
economic in nature.
• This means that artificial monopolies exist because of regulations created
to protect the industry.
• Start-up cost might be lower to block the entry of competitors, but patents
or licencing allow a single supplier to serve the entire market.
• Pharmaceutical businesses own some rights to some specific drugs they
have developed.
 FORMATION OF ARTIFICIAL MONOPOLIES
• An artificial monopoly has no advantage in production efficiency over
smaller firms but nonetheless manages to drive all of its competitors out of
business to remain as the only producer in the industry.
• Some businesses become artificial monopolies through buying out
competitors from the market to increase their market dominance.
• Artificial monopolies are therefore formed through licencing or patents
which legally makes a supplier the only producer of a particular product for
a given period.
 LOCAL MONOPOLY
• Local monopoly exist in a smaller scale when in a particular region there is
only one supplier of a specific product.
• There are no restrictions or barriers to entry into the market, but
geographical area makes a particular service provider a monopoly if
he / she does not have competition.
• For example, a medical doctor can be a monopoly if he / he is the only
service provider in a particular region.
COSTS AND REVENUES
 MARGINAL REVENUE CURVE
• The monopolist's marginal revenue from each unit sold does not remain
constant as in the case of the perfectly competitive firm.
• The monopolist faces the downward‐sloping market demand curve
indicating that for any additional unit sold, price must be lowered.
• So, the price that the monopolist can get for each additional unit of output
must fall as the monopolist increases its output.
• Consequently, the monopolist's marginal revenue will also be falling as the
monopolist increases its output.
 MONOPOLIST MR LIES BELOW AR
• Unlike in the perfect market, imperfect market average revenue (AR) and
marginal revenue (MR) curves are two separate curves, they are not identical.
• The marginal revenue curve is negatively sloped and lies below the average
revenue curve except on the first top left unit where they are equal.
• The reason for marginal revenue curve lying below average revenue curve is
that the firm must reduce the price if it wants to sell additional unit.
• Marginal revenue earned from the sale of additional unit will always be lower
than average revenue earned.
• Average revenue cannot be zero for the firm while marginal revenue can be
zero at the point where it cuts horizontal line halfway, and even be lower than
zero
 MARGINAL AND AVERAGE REVENUES CURVE FOR MONOPOLY
.
• The MR curve in negatively sloping / downward sloping.
• It is always below the AR curve.
REVENUES • As output increases, the price decreases.
• This decreases MR.
10 • MR curve therefore lies below AR curve.
• AR curve is the same as the demand curve for the monopolist.
6 • It is downward sloping indicating effects of price changes to
quantities.
3

AR=D
0
1 2 3 4
-2 QUANTITY
MR
 AVERAGE REVENUE CURVE
• Average revenue curve is downward sloping meaning its negatively
sloping.
• It is the same curve as a demand curve for the monopolist firm labelled
AR=D.
• Demand curve decreases with increase in quantity as prices decrease,
that result in negative downward slope.
• Average revenue decreases because with each subsequent addition in
quantity its marginal revenue decreases and eventually with each
additional unit, quantity in market average revenue continues to fall.
 DEMAND CURVE OF MONOPOLY
• The monopolist demand curve is negatively sloping (downward sloping)
which slopes from top left to bottom right.
• Since the monopolist is the only supplier of the whole market, its demand
curve represent the firm and the entire market / industry.
• Unlike in the perfect market, the monopoly is facing the downward sloping
demand curve because for the firm to increase its output, it decreases the
price.
• Influence or control over the price allow monopoly to charge prices based
on output its willing to supply.
 DEMAND CURVE OF MONOPOLY
• The demand curve is relatively inelastic indicating that the change in price
does not result to a huge change in quantity demanded.
• The monopolist firm is the only supplier of a unique product within the
market, no alternatives or perfect substitutes are made available.
• The demand curve for monopoly therefore represents the monopolist firm
and the entire market.
• Any change in price and quantity is reflected along the demand curve.
 DEMAND CURVE OF THE MONOPOLY
. • The demand curve slope downward from top left to the
bottom right.
• The original price is P while the original quantity is Q.
PRICE

• The firm decreased its price from P to P1 to increase the

output from Q to Q1
• Point A indicates the original price and original quantity.
P A
• Point B indicates the combination of a new price (P1) and
new quantity (Q1).
P1 B

D
0 Q Q1
QUANTITY
 TOTAL REVENUE CURVE DERIVATION
. QUANTITY PRICE TOTAL
REVENUE
1 70 70

120 2 50 100
REVENUE

3 40 120
TOTAL

4 30 120
100 5 20 100
TR

70

0 1 2 3 4 5

QUANTITY
TOTAL REVENUE CURVE EXPLANATION
• TR is positive / upward sloping from quantity 1 to
quantity 3.
• It increased from 70 to 120.
• TR is maximised at quantity 4 as it remains at
120.
• Beyond quantity 4, TR curve starts to be
downward sloping as it slope down to 100 in
quantity 5.
 AVERAGE REVENUE, MARGINAL REVENUE AND TOTAL RVENUE
• The demand curve reflects that the higher the price, the
lower is the quantity demanded while the lower the price,
REVENUE
COST/

the higher is the quantity demanded.

• AR/D indicates that demand curve is the same as AR
curve.
P • MR curve lies below AR curve.
P1 • Mr curve cuts horizontal axis in the middle .
AR / D • Changes in price are reflected by point along the
MR demand curve.
0 QUANTITY • Total revenue increases until it reach maximum then it
slope downward.
REVENU

• The monopolist firm maximises revenues at P and Q.

COST/

TR

0 Q Q1 QUANTITY
 AVERAGE COST AND MARGINAL COST
• MC curve is necessary as it determines profit maximisation
for the firm when it intersect MR.
• AC curve is necessary to determine if the firm is making a
COST profit, loss or normal profit.
MC AC • The firm produces nothing on the downward part of MC,
production begins on the upward sloping part.
• Average cost curve always intersect marginal cost curve
on its (AC) lowest.

0 QUANTITY
CHARACTERISTICS OF MONOPOLY
POSSIBLE ESSAY
 NUMBER OF SELLERS
 There is no competition as only single seller exist in the market.
 One seller completely controls the supply of goods and services to the
entire market.
 Because the monopolist is the only supplier of the product in the market,
its demand curve represent the individual firm and the entire market.
 For example: De Beers is the only diamond seller and represents the total
diamond industry while Eskom is the only supplier of electricity in South
Africa.
 NATURE OF THE PRODUCT
• Heterogenous products are unique, without any close substitute.
• If consumers cannot find the product in the single supplier, they go
without the product.
• This leaves consumers with no choice based on selling price, quality and
the supplier.
• Consumers therefore develop a dependency on the product sold by the
monopoly.
 CONTROL OVER PRICE
• Monopolist firms are price setters because they have a control over the
price.
• Monopolists always increase their prices to decrease output and decrease
prices to increase output. This means that increased price results to less
units of the product sold while reduced price results to high units of the
product sold.
• As much as the monopoly has a control over the price, it does not have a
control over the demand. The demand is therefore necessary for the firm to
determine the price.
 DOWNWARD SLOPING DEMAND CURVE
• The monopolist firm and the market are represented by a downward
sloping demand curve.
• The demand curve for a monopoly firm slopes downward because the firm
is a price setter, it can increase prices to reduce the output size and
decrease the price to increase the output size.
• The monopoly demand curve is relatively inelastic. This happens because
products produced are unique and the market entry is blocked.
• The increase in price does not affect the quantity demanded much which
means that the demand for products is relatively inelastic.
 HIGH BARRIERS TO ENTRY
• Market entry is completely blocked to new firms. New firms cannot enter
the market while the existing firm cannot leave the market.
• The market is protected by high barriers to entry which prohibit the entry of
new businesses.
• Barriers to entry such as patents, high start-up cost, licencing, copyrights,
and economies of scale, make it hard for new firms to access the market.
• As a result, competition does not exist in the market if a firm is a pure
monopoly.
 NO CONSUMER CHOICE
• Consumer choice is limited. The market does not provide alternatives for
consumers.
• Consumers may demand from the existing firm or go without a product.
• Since the product is not easily replaceable, the failure of the market to
supply the product results to its unavailability in the market.
 EFFECIENCY
• The market output is relatively small caused by no competition.
• Since the firm is the only supplier of a unique product for the entire market,
inefficiencies occur which result to undersupply of the product.
• For instance: Eskom is the only supplier of electricity in South Africa,
technical problems in this monopoly result to power supply reduction.
• Productive efficiency is possible in a monopoly but generally unlikely
because there is no incentive for the firm to improve its efficiency.
• Allocative inefficiency occur if the monopoly firm is unable to supply the
optimum quantity of goods and services as desired by consumers.
 SUPERNORMAL PROFIT IN BOTH SHORT AND LONG-RUN
• Monopolist firm can make supernormal profit in both short-run and long-
run.
• This market condition can prevail if average revenues of the firm exceed
average costs or when total revenues exceed total costs.
• The entire market share belongs to one firm.
• If firm’s average costs exceed average revenues or total costs exceed
total revenues, the firm makes economic loss.
 HIGH PRICES PREVAIL
• Monopolies exploit consumers with higher prices.
• Fewer products are made available at a higher prices.
• Monopolist firm easily ask for higher prices because it does not have
competitors.
• This results to products made available for only those who can afford,
while disadvantaged cannot access them.
 COMPLETE/ PERFECT INFORMATION
• Buyers and sellers have access to full information about the prevailing
market conditions.
• Monopoly has a high degree of transparency as there is no incentive to
hide information from consumers.
• Asymmetric information does not exist in monopoly, buyers and sellers
have common information about the product, pricing and the market for
the product.
 NO COLLUSION
• Collusion is an illegal ant-competitive practice that occurs when two or
more firms in the same industry act dependently implicitly or explicitly to
manipulate market conditions to their advantage.
• The entire market is dominated by a single supplier without any rivalries.
• The monopolist does not have any competitor to collude with which means
collusion is irrelevant and impossible in this market.
PROFIT AND LOSS (POSSIBLE ESSAY)

ECONOMIC NORMAL
PROFIT PROFIT

ECONOMIC
LOSS
 ECONOMIC PROFIT CONDITIONS
• Economic profit prevails when revenues earned are greater than costs incurred in the
business.
• It is also regarded as supernormal profit or abnormal profit.
• Average cost curve turns below average revenue curve.
• Average revenues exceed average cost (AR > AC).
• Economic profit also prevail if total revenues exceed total costs for the business (TR > TC).
• The economic profit condition indicates that more revenues are earned after sales as
compared to costs incurred during the production process.

Economic profit can be calculated in two ways:

• AR – AC x Q or
• (AR x Q) – (AC x Q) which is TR – TC.
 ECONOMIC PROFIT GRAPH
PRICE • Point e is the profit maximisation point where
MC MR=MC.
AC • The firm makes economic profit because
AR>AC.
• AC turns below AR.
150 ECONOMIC • Shaded area indicates economic profit.
90 PROFIT • Profit = AR - AC x Q: 150 – 90 x 110 = R 6600 .
.
e

MR AR = D
110 QUANTITY
0
 ECONOMIC LOSS CONDITIONS
• Economic loss prevails when revenues earned are lower than costs
incurred in the business.
• Average cost curve turns above average revenue curve.
• Average costs are greater than average revenues (AC > AR).
• Economic loss also prevail if total cost exceed total revenue for the
business (TC > TR).
• The economic loss condition indicates that less revenues are earned after
sales as compared to costs incurred during the production process.
 ECONOMIC LOSS CONDITIONS
• If a firm faces economic loss, no gain has been earned by the firm on its
operations.
• This generally means that expenses of the business are more than income
earned by the business after sales.
• Under this condition, the firm decides either to continue producing the
product or not.
• Economic loss can be calculated in two ways:
AR – AC x Q or
(AR x Q) – (AC x Q) = TR – TC.
 ECONOMIC LOSS GRAPH
PRICE • Point e is the profit maximisation point where
MC AC MR=MC.
• The firm makes economic loss because
AC>AR.
200
ECONOMIC • Average cost turns above average revenues.
LOSS
100
• Shaded area indicates economic loss.
. • Profit = AR-AC x Q: 100 – 200 x 60 = - R 6000.
• The firm makes economic loss.
e

MR AR = D
0 60 QUANTITY
 NORMAL PROFIT CONDITIONS
• Normal profit prevails when revenues earned by the business are equal to
costs incurred in the business.
• Average cost curve turns on the average revenue curve.
• Average revenues equal to average costs or total revenues are equal to
total costs (AR=AC or TR=TC).
• The normal profit condition indicates that revenues earned are equal to
costs incurred in the business.
 NORMAL PROFIT CONDITIONS
• Normal profit is known as break-even since the firm is not making a profit
neither a loss.
• These are minimum earnings that prevent the firm from leaving the market.
• Normal profit indicates that the firm’s income earned is equal to expenses
for the business.
• Normal profit can be calculated as follows:
• AR – AC x Q or (AR x Q) – (AC x Q) which is TR-TC
 ECONOMIC LOSS GRAPH
• Point e is the profit maximisation point where
MR=MC.
REVENUE
MC AC
COST/

• The firm makes normal profit because AC=AR.

• AC turns along the AR.
• The firm breaks even since it doesn’t make a
profit or a loss.
300 • Profit = AR-AC x Q: 300 – 300 x 100= R0.
• The firm makes a normal profit.

e .

MR AR = D
0 100 QUANTITY
 ASSESSMENT EXAMPLE - MONOPOLY
• Draw a fully labelled graph to show the economic loss in a monopoly
market structure. (NOV/DEC 2020)
 ASSESSMENT EXAMPLE - MONOPOLY
Draw a fully labelled graph to show the economic loss in a monopoly market structure. (DEC
2020)
ALLOCATION OF MARKS
• Correct labelling of axes = 1 mark
• Correct drawing/positioning and labelling of MC curve = 1 mark
• Correct drawing/positioning and labelling of AC curve = 1 mark
• Correct drawing/positioning and labelling of MR curve = 1 mark
• Correct drawing/positioning and labelling of AR curve = 1 mark
• Loss minimizing point = 1 mark
• Indication of economic loss = 2 marks
• Correct labelling on axes = 1 mark
• Maximum marks = 8 marks
 ASSESSMENT EXAMPLE - MONOPOLY
• With an aid of a graph, explain the relationship between marginal
revenue and the demand curve (AR) of a monopoly. (NOV/DEC 2021)
 ASSESSMENT EXAMPLE - MONOPOLY
• The marginal revenue curve, with the
exception of the first unit, will lie below
the dd/AR curve 
• The demand curve (AR) is negatively
sloping, which results in more goods
being sold at a lower price, hence the
additional revenue (MR) will decrease as
well 
• MR curve intersects the horizontal axis at
a point halfway between the origin and the
AR curve 
• The monopolist will always set a price
above point A on the AR curve, because
marginal revenue will be positive (8)
THANK YOU