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Monopoly Exam Notes

What is Monopoly?

  • A monopoly exists when one firm dominates the market.
  • A pure monopoly exists when just one producer supplies a market.
  • Legal monopoly: In some countries, if a firm has 25% or more of a market, it is considered a monopolist.
  • Local monopoly: When one firm supplies an entire local market.

Features of Monopoly

  • One Business Dominates the Market: One seller controls the majority of the market share.
  • Unique Product: The product supplied by a monopolist is highly differentiated with no close substitutes.
  • Price-Maker: Monopolists control prices by restricting quantity supplied.
  • Barriers to Entry: Obstacles prevent new entrants from competing, including:
    • Legal barriers
    • Patents
    • Marketing budgets
    • Technology
    • High start-up costs

Advantages of Monopoly

  • Efficiency: Natural monopolies may be more efficient with a single supplier.
    *Natural monopolies occur when one firm can serve the entire market at a lower cost than many smaller firms.
  • Innovation: Monopolies have resources to invest in R&D.

Disadvantages of Monopoly

  • Higher Prices: Dominant firms can charge more by restricting output.
  • Restricted Choice: Consumers have limited options.
  • Lack of Innovation: Reduced incentive to innovate due to lack of competition.
  • Inefficiency: Monopolies may become inefficient due to lack of competition, leading to unnecessary costs and poor customer service.

Subject Vocabulary

  • Monopoly: A situation where there is one dominant seller in a market.
  • New Entrant: A company that starts to sell goods or services in a market where they have not sold them before.
  • Price Maker: A dominant business able to set the price charged in the whole market.
  • Patent: Licence that grants permission to operate as a sole producer of a newly designed product
  • Natural Monopolies: Situation that occurs when one firm in an industry can serve the entire market at a lower cost than would be possible if the industry were composed of many smaller firms.

Economies of Scale

  • Monopolists can exploit economies of scale, potentially lowering prices for consumers.
  • Domestic monopolies may compete more effectively overseas, increasing employment and national income.