A monopoly is a market structure where a single seller or producer assumes a dominant position in an industry or a sector. Monopolies are discouraged in free-market economies as they stifle competition and limit consumer substitutes. Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)
Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)
INTRODUCTION
A firm is regarded as a monopolist when it owns or controls the total supply of a scarce factor of production. Monopoly is a market structure where only one seller operates. 🗸🗸
BODY: MAIN PART
The characteristics of a monopoly
Number of firms
- The monopoly consists out of one single firm. 🗸🗸
- The monopoly is also the industry. 🗸🗸
- Example: Eskom or De Beers – diamond-selling 🗸🗸
[Accept any other relevant example]
Nature of product
- The product is unique with no close substitute. 🗸🗸
- Example: Diamonds are unique. 🗸🗸
Market entry
- Refers to how easy or difficult it is for businesses to enter or to leave the market 🗸🗸
- Is entirely/completely blocked. 🗸🗸
- A number of barriers to entry that may give rise to monopoly can be:
- Economies of scale 🗸🗸
- Limited size of the market 🗸🗸
- Exclusive ownership of raw materials 🗸🗸
- Patents 🗸🗸
- Licensing 🗸🗸
- Sole rights 🗸🗸
- Import restrictions 🗸🗸
They decide on their production level
- The monopolist cannot set the level of output and the price independently of each other. 🗸🗸
- If a monopolist wants to charge a higher price, it has to sell fewer units of goods. 🗸🗸
Alternatively, a reduction in price will result in a higher output sold. 🗸🗸 - A monopolist is confronted with a normal market demand curve 🗸🗸
- The demand curve slopes downwards from left to right 🗸🗸
- Any point on the monopolist’s demand curve (D) is an indication of the quantity of the product that can be sold and the price at which it will trade. 🗸🗸
They are exposed to market forces
- Consumers have limited budgets and a monopoly can therefore not demand excessive prices for its product. 🗸🗸
- The monopolist’s product has to compete for the consumer’s favour and money with all other products available in the economy. 🗸🗸
They face substitutes
- There are few products that have no close substitutes. 🗸🗸
- For example, cell phones can compete with telephone services. 🗸🗸
They may enjoy favourable circumstances
- Sometimes an entrepreneur may enjoy favourable circumstances in a certain geographical area. 🗸🗸
- For example, there may be only one supplier of milk in a particular town. 🗸🗸
They may exploit consumers
- Because a monopolist is the only supplier of a product, there is always the possibility of consumer exploitation. 🗸🗸
- However, most governments continually take steps to guard against such practices. 🗸🗸
Market Information
- All information on market conditions is available to both buyers and sellers. 🗸🗸
- This means that there are no uncertainties. 🗸🗸
Control over price
- In the case of a monopoly there are considerable price control, but limited by market demand and the goal of profit maximisation. 🗸🗸
Long-run economic profit
Can be positive
- Because new entries are blocked and short-run economic profit therefore cannot be reduced by new competing firms entering the industry 🗸🗸
- The monopoly can thus continue to earn economic profit as long as the demand for its product remains intact 🗸🗸
Body: Additional part
Long run equilibrium of a monopoly
Heading = 1 mark
AC = 1 mark
DD/AR = 1 mark
MC = 1 mark
Profit maximisation point =1 mark
Labelling of the axis = 1 mark
Labelling on the axis = 1 mark
Long run equilibrium of a perfect competitor
Heading = 1 mark
AC = 1 mark
DD/AR = 1 mark
MC = 1 mark
Profit maximisation point =1 mark
Labelling of the axis = 1 mark
Labelling on the axis = 1 mark
MAX = 5 marks
CONCLUSION
A monopoly does not always make economic profit in the short run; it can also make economic loss in the short run if the total cost exceeds total revenue. 🗸🗸