9.5

• A monopoly is the opposite of perfect competition. In a monopoly, there is only one seller in the market, meaning the monopolist controls the entire supply of a good or service.
• Features of a Monopoly:

  • The monopolist is the only seller and often faces no direct competition.
  • The firm and the industry are the same in a monopoly, as the single firm controls all the market output.
  • The monopolist sets the price, unlike in a competitive market where the market price is determined by supply and demand.
• Market Share and Monopoly Power

  A monopolist has 100% market share, meaning they control all the production and sales in the market. A firm with a high market share but facing some competition is not a true monopolist but can be a dominant firm (discussed later).
• How Does a Monopoly Arise?

  Monopolies exist due to barriers to entry, which prevent other firms from entering the market. These barriers give the monopolist the power to remain the sole provider of a good or service.
• Barriers to entry:

  economies of scale

  ownership or control of essential reosurces

  legal barriers
• Economies of Scale:

  • Large economies of scale allow a single firm to produce at a much lower cost than multiple smaller firms. This is called a natural monopoly.
• Ownership or Control of Essential Resources:

  • Sometimes a monopoly arises because one firm controls a resource essential for production
• Legal Barriers:

  • Governments grant patents or copyrights, giving a firm the exclusive right to produce or sell a good.
• A natural monopoly occurs when it’s cheaper for one firm to supply the entire market than for multiple firms to share it. In such a case, competition would lead to higher costs for everyone, so one firm dominates.
• In a natural monopoly, the firm's average cost (AC) decreases as output increases. This means that producing more leads to lower costs because of economies of scale.
• Unlike competitive firms, monopolists don’t take prices as given. Instead, they have pricing power. A monopolist can set the price of their good based on the demand they face, which is different from perfect competition where firms are price-takers.
• Competitive firms: The firm’s price equals marginal cost (MC), and it sells as much as it can at the market price.
• • Monopoly: The monopolist sets the price above marginal cost because it faces the entire market demand curve.
• A monopolist maximizes profit by choosing the output level where marginal revenue (MR) equals marginal cost (MC). The monopolist does not charge this price, however. It will look at the market demand curve to see what price it can charge at the profit-maximizing output level.
• profit maximisation in a monopoly:

  • The monopolist first finds the output level (Q) where MR = MC.
  • It then looks at the demand curve to find the price it can charge for that output level
• Dominant Firms

  Although not true monopolists, dominant firms have a large share of the market and can still behave like monopolists to a certain degree.
• Monopoly:

  • A market structure where one firm controls the entire supply and sets the price.
  • Barriers to entry, like economies of scale, control of essential resources, or legal barriers, prevent other firms from entering the market.
• • Monopolist's Pricing Power:
  • The monopolist sets prices based on market demand and produces at the point where MR = MC.
  • Monopolists have pricing power because they are the sole provider of the good or service in the market.
• • Natural Monopoly:
  • Occurs when economies of scale make it cheaper for one firm to supply the entire market. Examples include public utilities like water or electricity.
• Dominant Firms:

  • Firms like Microsoft may not be monopolies, but they hold significant market power due to their large share of the market.