BASIC MICROECONOMICS
(BA-C 211)
NOVEMBER 10, 2020
MONOPOLY
CHAPTER 9
PRAYER
CHECKING OF ATTENDANCE
QUICK REVIEW
What is market structure?
- refers to the characteristics of the market either
organizational or competitive, that describes the
nature of competition and the pricing policy
followed in the market.
QUICK REVIEW
What are the four types market structure?
1. Pure or Perfect Competition
2. Monopoly
3. Monopolistic Competition
4. Oligopoly
ASSUMPTIONS IN PERFECT COMPETITION
1. Large number of sellers and buyers
2. Product Homogeneity
3. Free entry and exit of firms
4. Profit Maximization
5. No government regulation
If your firm fulfills assumption 1 to 5, then you are
a pure competition market. A perfect competition
market requires number 6 and 7 assumptions be
fulfilled.
ASSUMPTIONS IN PERFECT COMPETITION
6. Perfect mobility of factors of Production
- the factors of production are free to move from one firm to
another throughout the economy. It is also assumed that
workers can move between different jobs.
7. Perfect Knowledge
- It is assumed that all the sellers and buyers have complete
knowledge of the conditions in the market.
LEARNING OBJECTIVES:
At the end of this lesson, the students will be able to:
1. Distinguish between a natural monopoly and a legal monopoly.
2. Differentiate perfect competition from monopoly
3. Explain how monopolies form: Barriers to entry
4. Compute for marginal cost and marginal revenue
WHAT IS MONOPOLY?
INTRODUCTION
• Monopoly
Mono
– Single
Poly
- Seller
MONOPOLY
A monopoly is said to exist when one firm is the
sole producer or seller of a product.
No close substitutes for the product of that firm
should be available
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MONOPOLY
The following are essential:
1. One and only one produces and sells a particular
commodity or service.
2. There are no rivals or direct competitors of the
firm.
3. No other seller can enter the market for whatever
reasons ------ legal, technical or economic.
4. Monopolist is a price maker.
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TYPES OF MONOPOLY
1. Natural Monopoly
where the barriers to entry are something other
than legal prohibition
2. Legal Monopoly
where laws prohibit (or severely limit)
competition
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MARKET CONDITION IN MONOPOLY
There is only one firm in the industry and so there is no
difference between the demand curve for the industry and the
firm.
Since a normal demand curve is assumed, it is necessary for
the monopolist to reduce price in order to increase the quantity
sold.
In other words in order to increase sales the monopolist must
reduce the price of all goods sold and therefore marginal
revenue will always be less than average revenue under
monopoly.
BARRIER TO ENTRY
Anything that impedes the ability of firms to
begin a new business in an industry in
which existing firms are earning positive
economic profits.
There are general classes of barriers to
entry:
Natural barriers
Technological barriers
Sociological barriers
Natural barriers – The firm has a unique ability to
produce what other firms can’t duplicate.
Technological barriers – The size of the market can
support only one firm.
Sociological barriers – Entry is prevented by custom or
tradition.
Government barriers – Governments often provide
barriers, 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 certain period.
SOURCES OF MONOPOLY
1. Legal Restrictions
- some public sector services are statutory monopolies, which
means their position is protected by law.
- a monopoly position might also be protected by patent
which prevents other firms fro producing an identical good during
the life of a patent
2. Capital Cost
- certain businesses, such as international airlines and
chemical companies, have relatively high set-up cost
SOURCES OF MONOPOLY
3. Natural Factor Endowment
- A particular country has a monopoly in the supply of a
particular commodity due to natural factor endowments and it is
impossible to obtain supply of the commodity from any other
source.
4. Tariff and Quotas
- A tariff raises the price of goods imported into the domestic
economy and a quota restricts the volume that can be imported.
They, therefore, protect domestic industry from international
competition.
MONOPOLY VERSUS PERFECT COMPETITION
Perfect Competitive Firm Monopoly
Is one of many producers Sole producer
Horizontal demand curve Has downward sloping
Price Taker demand curve
Sales as much or as little at Price Maker
same price Reduces price to increase
sales
MONOPOLY VERSUS PERFECT COMPETITION
DEMAND AND REVENUE UNDER MONOPOLY
In a monopoly situation, there is no difference between firm &
industry.
Firm’s demand curve also constitutes industry’s demand curve.
It slopes downward. It means if the monopolist fixes high price,
the demand will shrink or decrease. On the contrary, if he fixes
low price, the demand will expand or increase.
DEMAND AND REVENUE UNDER MONOPOLY
A
Demand curve of the
monopolist is also average E > 1 Increase In TR
revenue (ARC) curve. It E=1 (TR Maximum)
Revenue
slopes downward. It means P L
N
if the monopolist fixes high E<1 (Decrease inTR)
price, the demand will
shrink. D = Average Revenue
O Marginal revenue X
Q OUTPUT
Demand rises with fall in price(AR)
At point „N‟, total revenue will be maximum.( i.e. ,TR = P x Q)
Average revenue is never zero, but marginal revenue may be
zero or even negative
At OP price, the monopolist will produce OQ quantity of
output, because this price affords him maximum total 13
revenue.
EVALUATION
• How perfect competition differ to monopoly?
ASSIGNMNET
• Research on the characteristics of firms under
monopolistic competition and oligopy.
