ECO130 - Topic 4

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  1. Monopoly
    A market structure characterised by

    • - A single seller
    • - A unique product
    • - Extremely difficult or impossible entry into the market
  2. Single Seller
    One firm provides the supply of a product in a given market.
  3. Local Monopolies
    More common real-world approximations of the model than national or world-market monopolies.

    • - Power company
    • - Country Service Station
    • - Canteen at a Stadium
  4. Unique Product
    There are no close substitutes for the monopolist's product, so the monopolist faces little or no competition.

    - Electricity for lighting
  5. Barriers to Entry
    • - Ownership of a vital resource
    • - Legal barriers
    • - Economies of scale
  6. Ownership of a Vital Resource
    Sole control of the entire supply of a strategic input.

    • Mineral - ALCOA
    • Human Resource (Labour) - Association of Tennis Professionals.
  7. Legal Barries
    Oldest and most effective are the result of government ownership or the issuing or franchises and licences.

    Government operates the monopoly itself or permits a single firm to provide a certain product or service and excludes competing firms by law.

    • - Water and Gas
    • - Casinos and off-course betting on horse racing
  8. Economies of Scale (Natural Monopoly)
    An industry in which the long-run average cost of production declines throughout the entire range of output.

    As a result, a single firm can supply the entire market demand at a lower cost than two or more smaller firms.
  9. Price Maker
    A firm that faces a downward-sloping demand curve and can therefore choose among price and output combinations along the demand curve.
  10. Monopolies Maximum Profits
    The monopolist maximises profit by producing that level of output for which MR = MC.

    The corresponding price will be on the elastic segment of its demand curve.
  11. Monopolies In The Long Run
    If the factors determining the positions of a monopolist's demand and cost curves mean that it earns an economic profit, and if nothing disturbs these factors, the monopolist will earn economic profit in the long run.
  12. Price Discrimination
    Occurs when, for the same product, a seller charges different customers different prices not justified by cost differences.
  13. Price Discrimination Conditions
    - Seller must be a price maker (downward-sloping demand curve)

    - Seller must be able to segment the market by distinguishing between consumers willing to pay different prices.

    - Must be impossible or too costly for customers to engage in arbitrage.
  14. Arbitrage
    The practice of earning a profit by buying a good or service at a low price and reselling it at a higher price.
  15. Monopolist - Resource Misallocator
    Efficiency occurs when a competitive market is at equilibrium.

    Consumers want the monopolist to use more resources and produce additional units that could be sold at a lower price, but the monopolist restricts output to maximise profit.
  16. Market Structure
    A classification system for the key characteristics of a market.

    • - Number of firms
    • - Similarity of products sold
    • - Ease of entry and exit from
  17. Perfect Competition
    A market structure characterised by

    • - A large number of firms
    • - A homogenous product
    • - Very easy entry into and exit from
  18. Large Number of Sellers
    The condition is met when each firm is so small relative to the market that no single firm can influence the market price.
  19. Homogenous Product
    Buyers are indifferent as to which seller's product they buy.
  20. Easy Entry and Exit From
    A new firm faces no barriers to its entry into the market and there are no contractual or legal reasons why it must continue.
  21. Competition Policy
    Designed to promote efficiency through the encouragement of competition and the outlawing of anti-competitive practices.
  22. Price Taker
    A seller with no control over the price of its product (perfectly elastic).
  23. Marginal Revenue
    The change in total revenue from the sale of one additional unit of output.
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ECO130 - Topic 4
ECO130 - Topic 4 (8)
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