Monopoly & Diagrams

What are possible BTE in a monopoly?

• EOS = low average costs due to high output

• Natural monopoly = upfront investment/fixed cost may be large making it unprofitable for other companies

• Legal and technical barriers = patents, copyrights for technology

• Brand loyalty = if there have always been one firms, consumers may be reluctant to switch

• Ownership/control of resources

Difference between AR and MR in monopoly

Monopoly diagram

• Consumer surplus: what is it?

Consumer / Producer Surplus

• Consumer surplus is quite easy to understand, since it’s the difference between how much someone is willing to pay for a given quantity of goods, an how much they actually pay.

•So if I would pay £10 and I pay £7 , I keep £3 to spend elsewhere and thus increase my welfare. So C S is a gain to society

Producer surplus:

• Producer surplus is the difference between the price the producer is paid and the cost of production.

• So If a producer could S at £6 but the Price is £11 they get an extra £5 of profit. Again a gain to society

Draw the diagram of monopoly, including the deadweight loss to society

• so monopolies take surplus away from consumers and also reduces surpluses ( welfare) to society

What are the negative effects on consumers/ Govt / Economy of monopolies?

• High Prices / low output (diagram)

• Uses power to restrict market , stop competition by barriers to entry.

• Poor quality due to no competition.

• X – Inefficiency. – It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms.Therefore the AC curve is higher than it should be.

• P Discim

• Consumer surplus fall

What are the positive effects on consumers/ Govt / Economy of monopolies?

• Secure jobs . Less likely to go under. But pushes small firms out (loses jobs)

• High supernormal profits reinvested into the firm for better goods in future (help consumers). Competitive firms can’t do this. Research & Development In many industries which require substantial investment – a competitive industry with many small firms would be unsuitable.

• High Corporation tax ( but some avoid eg Starbucks)

• Econ of Scale.... Lower Prices ??? or higher profits.(ME SHOW THIS)

• Modern economy... give people what they want ....ie massive tesco.

What is natural monopoly?

• occurs when the most efficient number of firms in the industry is one.

• A natural monopoly will typically have very high fixed costs meaning that it is impractical to have more than one firm producing the good.

• An example of a natural monopoly is tap water.

Examples of Natural Monopolies

• Gas network

• Electricity grid

• Railway infrastructure

Draw a diagram for natural monopoly