theme 3 : monopolies

assumptions of a monopoly

• can only be established where there is a single seller in the market i.e. there are no close substitutes - therefore market demand is equal to the firms demand curve

• high barriers to entry - new entrants to the market find it impossible to match the costs and prices of the established firm in the industry, only remain a monopoly if these barriers exist

• in the uk a firm is classified as a monopoly if it has more than 25% of the total market

main barriers to entry that uk supermarkets have

• land purchases / land holding : may be used to prevent rivals from opening shops close by which means smaller firms can’t expand

• if a company has dominance over a local market, may prevent other firms from being close to maintain dominance

• putting pressure on suppliers : can put pressure on suppliers and transfer the risk and cost disadvantages to suppliers instead of having it themselves

total revenue curve

• price on y axis

• output on x axis

• upside down ‘u’ shape

average and marginal revenue curve

• price on y axis

• output on x axis

• average revenue curve is a downward sloping curve

• marginal revenue curve falls at twice the rate and becomes negative

how are the total revenue curve and the average and marginal revenue curve related

• the peak of the total revenue curve plotted down is where the marginal revenue curve becomes negative

• see notes from 20/01/25 to see graph

when is total revenue maximised

• maximised where MR is 0

abnormal profit making monopoly in the short run

• price on y axis

• output on x axis

• abnormal profit is the red box

loss making monopoly

• price on y axis

• output on x axis

• price from demand curve is lower than profit maximising price so firm makes a loss

summary of a monopoly

• a pure monopoly is the sole supplier in an industry

• as a result, the monopolist can take the market demand curve as its own demand curve

• a monopolist therefore faces a downward sloping AR curve

• with an MR curve falling at twice the rate of AR

where is profit maximised

where MR = MC

equilibrium profit maximising output point

• this is where you track down from MR = MC

• consumers will be willing to pay the price up for this output

perfectly competitive firms vs monopolise

• perfectly competitive firms operate with allocate efficiency which means their output is where MC=P

• monopolies set their output where MR=MC if they are profit maximising