Boundless EconomicsMonopoly
Introduction to Monopoly
Defining MonopolyA monopoly is an economic market structure where a specific person orenterprise is the only supplier of a particular good.
Learning ObjectivesDifferentiate monopolies and competitive markets
Key TakeawaysKey PointsA monopoly market is characterized by the profit maximizer, price maker, highbarriers to entry, single seller, and price discrimination.Monopoly characteristics include profit maximizer, price maker, high barriers toentry, single seller, and price discrimination.Sources of monopoly power include economies of scale, capital requirements,technological superiority, no substitute goods, control of natural resources,legal barriers, and deliberate actions.There are a few similarities between a monopoly and competitive market: thecost functions are the same, both minimize cost and maximize profit, theshutdown decisions are the same, and both are assumed to have perfectlycompetitive market factors.Differences between the two market structures including: marginal revenue andprice, product differentiation, number of competitors, barriers to entry, elasticityof demand, excess profits, profit maximization, and the supply curve.The most significant distinction is that a monopoly has a downward slopingdemand instead of the "perceived" perfectly elastic curve of the perfectly
competitive market.
Key Termsmonopoly: A market where one company is the sole supplier.differentiation: The act of distinguishing a product from the others in themarket.
A monopoly is a specific type of economic market structure. A monopoly existswhen a specific person or enterprise is the only supplier of a particular good. Asa result, monopolies are characterized by a lack of competition within themarket producing a good or service.
Monopoly: The graph shows a monopoly and the price (P) andchange in price (P reg) as well as the output (Q) and output change(Q reg).
Characteristics of a MonopolyA monopoly can be recognized by certain characteristics that set it aside fromthe other market structures:
Profit maximizer: a monopoly maximizes profits. Due to the lack ofcompetition a firm can charge a set price above what would be charged in acompetitive market, thereby maximizing its revenue.Price maker: the monopoly decides the price of the good or product beingsold. The price is set by determining the quantity in order to demand the pricedesired by the firm (maximizes revenue).High barriers to entry: other sellers are unable to enter the market of themonopoly.Single seller: in a monopoly one seller produces all of the output for a good orservice. The entire market is served by a single firm. For practical purposes thefirm is the same as the industry.Price discrimination: in a monopoly the firm can change the price and quantityof the good or service. In an elastic market the firm will sell a high quantity ofthe good if the price is less. If the price is high, the firm will sell a reducedquantity in an elastic market.
Sources of Monopoly PowerIn a monopoly, specific sources generate the individual control of the market.Sources of power include:
Economies of scaleCapital requirementsTechnological superiorityNo substitute goodsControl of natural resourcesNetwork externalitiesLegal barriers
Deliberate actions
Monopoly vs. Competitive MarketMonopolies and competitive markets mark the extremes in regards to marketstructure. There are a few similarities between the two including: the costfunctions are the same, both minimize cost and maximize profit, the shutdowndecisions are the same, and both are assumed to have perfectly competitivemarket factors.
However, there are noticeable differences between the two market structuresincluding: marginal revenue and price, product differentiation, number ofcompetitors, barriers to entry, elasticity of demand, excess profits, profitmaximization, and the supply curve. The most significant distinction is that amonopoly has a downward sloping demand instead of the "perceived" perfectlyelastic curve of the perfectly competitive market.
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