Economics: Monopoly Notes

ECO2003F Monopoly


MONOPOLIES

Definition
o A market structure in which a single seller of a product with no
close substitute serves the entire market
o eg: De Beers (diamonds); Eskom (electricity); Telkom
(telephones)

Difference to PC
o Only one firm producing
o Price-setters: can dictate the price the market trades at
o Downward-sloping demand curve
 Market demand is their demand curve
 Inverse relationship between price and quantity
demanded

5 Sources of Monopoly
1. Exclusive control over important inputs
 Other firms can’t really get involved
 It may not be permanent (people may not always
want it)
 There is still a degree of competition (Coke vs
Pepsi)
 Eg: OPEC and oil; spring water
2. Economies of scale
 Monotonically decreasing long run average cost
curve = natural monopoly
 Firm can decrease costs by increasing production
 More likely to be persistent since monopoly arises
from nature of production processes
 Eg: Eskom
3. Patents: licenses from the govt.
 Transitory: expire when patents expire (about 20
years)
 Also subject to pressure as substitute goods are
produced
 Eg: cipla and other pharmaceuticals
4. Network economies:
 Likely to be more persisten because again monopoly
arises from nature of production processes and particula
attributes of a product (high upfront costs, decling LR
costs)
 Eg: Blackberry had BBm so we had to have BB to chat;
qwerty keyboards; microsoft word
5. Government licences or franchises: need a license to trade
under some franchise
 Transitory as it expires when license expires and it may
be given to someone else
 Eg: Taxi industry; fishing quotas; mining rights

, ECO2003F Monopoly




Total Revenue Curve
o TR = P x Q
o Demand curve: P = a + bQ
o So TR = aQ + bQ2
o Quadratic and inverse U

Profit Maximising Monopolist
o Business still wants to maximise profits but now MR is not = to
price
o Profit still where MR = MC
o Profit = TR – TC @ (p, q)
o If MR > MC  increase profit while expanding output as TR
increasing more than TC
o If MR < MC  increase profit by contracting ouput as TC
decreases by more than TR

Marginal Revenue
o



o Slope of MR is double the slope of Demand
Curve
o Eg: P = 12 – 3Q so MR = 12 – 6Q
o Graphically: MR curve has a value of 0
halfway along demand curve
(TR maximised halfway along DC)
o MR always below price


Marginal Revenue and Elasticity
o MR>0 when we operate on the
elastic part of our demand
curve.
Maximising profit
o MR<0 when we operate on
inelastic part of demand curve
Maximising Revenue
o MR=0 when we’re unitary
elastic
o Monopolist will never be on
inelastic portion