By LISA BRENNAN
What is a monopoly?
A monopoly is an industry in
which there is only one
producer of the product
An Example of a monopoly:
Higher level questions:
ORDINARY LEVEL QUESTIONS:
Only 1 firm in the industry – they’re a price maker.
The firm aims to maximise profits
There are barriers to entry
The firm can control either the price charged or the
quantity sold but not both – the demand curve
determines the other.
There is perfect knowledge of profit and cost levels.
2010 HL Q2 (a)
How a monopoly arises/ barriers to
THROUGH LEGISLATION- gov grants 1 firm the sole
right to produce a product or service.
MERGERS/ TAKE-OVERS- existing firms in the industry
are taken over by 1 firm
ACCESS TO RAW MATERIAL- if a firm has sole access
to an important raw material it can gain a monopoly
CARTELS- firms agree not to compete in certain
2011 OL Q1 (b), 2010 OL Q1 (b), 2008 OL Q1 (b), 2005 Q1, 2001 Q1
PRODUCT DIFFERENTIATION- a firm can create brand
loyalty so that consumers would never switch to any
ECONOMIES OF SCALE- the larger a firm gets the lower
its AC becomes, so when competitors attempt to enter
the market the existing firm will lower its price so no
one can compete against it.
COPYRIGHTS/ PATENTS- where inventors of a product
can legally prevent anyone else from selling it.
NATURAL MONOPOLY- sometimes it’s not possible to
survive in business unless you have all or nearly all of
2008 HL Q2 (c) and 2004 Q1 (b)
HL 2010 Q2, HL 2008 Q2, HL 2004 Q1, HL 2000 Q1,
OL 2010 Q1, 2008 Q1, 2005 Q1, 2001 Q1
• Occurs at point A where
• MC = MR and MC is rising and
cuts MR from below.
2. Price charge & /Output
• The firm produces output Q1
and sells it at price P1 on the
3. Cost of production
• The cost of producing this output
shown at point C/D.
4. Super Normal Profits.
• This firm is earning SNP’s .
because AR > AC and
• they can continue to earn SNP’s
because barriers to entry exist..
5. Waste of Scarce Resources
• Because the firm is not
producing at the lowest point of
the AC curve it is
wasting scarce resources.
Advantages of monopoly:
Benefit from economies of scale, allowing
them to sell products at lower prices.
Large scale production helps avoid
wasteful duplication of resources.
They’re less vulnerable to change in the
level of demand – therefore employment
is more secure.
OL 2010 Q1
Disadvantages of monopoly:
Doesn’t produce at lowest AC = waste of eco
The consumer is exploited (indicated by
Consumers don’t have a choice of products
No incentive to be innovative as there is no
Able to practice price discrimination
Is allowing more suppliers of a
good/ service into the market
Effect of deregulation on:
Increased availability of service.
Loss of essential non-profit
Loss of quality in service
Higher prices in future
Loss of employment in existing
Job opportunities with new
Changed working conditions.
HL 2008 Q2, 2004 Q1
Takes place when producer sells the
Same product to two or more different
Markets at different prices – price
Difference isn’t related to any difference
In costs in these markets.
HL 2010 Q2, 2008 Q2, 2000 Q2,
• A monopolist attempts to remove consumer
• A monopolist identifies those consumers
who are prepared to pay a higher price and
consequently charges them that higher price.
• This type of price discrimination can occur
in one-to-one confidential services. E.g. doctors/
large quantities are sold at lower prices e.g. bulk
• Consumers have different price elasticities of
• Consumers with inelastic demand pay a
higher price than consumers with elastic
demand e.g. cinemas
Conditions necessary for
Some degree of Monopoly power
Separation of markets – consumers in 1 market
mustn’t be able to transfer the product to those in
Different consumer price elasticity of demand.
Consumer attitude to the goods
HL 2010 Q2, 2004 Q1, 2000 Q2, 1998 Q1
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