Monopoly

Monopoly

A monopoly is a market with only firm in it. In other words, a single frim has 100% market share.

Even in markets with more than one seller, firms have monopoly power if they can influence the price of a particular good on their own i.e they can act as price makers

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How monopoly power comes about

Barriers to entry preventing new competition entering a market to compete awya large profits

Advertising and product differentiaiton - a firm may be able to act as aprice maker if consumers think of its products as more desirable than those produced by other firms (e.g because of a strong brand)

Few competitiors in the market - if a market is dominated by a small number of firms, these are likely to have some price making power. They'll also find it easier to differentiate products.

Even though firms with monopoly power are price makers, consumers can still choose whther or not to buy thier products. So demand will still depend on the price - as always, the higher the price, the lower the demand will be

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Supernormal profits

a monoplist makes supernormal profit in the long run

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explanation of diagram

This diagram shows how a frim behaves in a monopoly market. Assuming that the firm wants to maximise priofits , its level of output will be where MC=MR. If the firm produces a quantity Qm, the demand or AR curve shows the price the firm can set  Pm. At this output the average cost (AC) of producing each unit is ACm. The difference between ACm and Pm is the supernormal (excess) profit per unit. So the total supernormal profit is shown by the blue area. In a monopoly market, the barriers to entry are total so no new firms enter the market, and this supernormal profit is not competeed away. This means the situation remains as it is - this is the long run equilibruim postition for a monopolist,

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Productively and Allocatively inefficent

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