Economics involves the choices people make when matching their limitless needs and wants with a scarcity of resources. The word “economics” is derived from the Greek words “oikos”, which means house, and “nomos”, which means manager. So the term originally referred to management of the household. Today, the term has been broadened to refer to firms and all of society. Another way of looking at economics is to consider the field as a set of tools for analyzing people and groups and the choices that they make. Accountants are trained to render an account of financial activity for a company. Lawyers are trained into a certain mode of thinking so as to resolve issues in a legal framework. Similarly, economists are trained to use a set of tools and principles to analyze why individuals, firms, governments and other groups behave as they do.
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2.0 What is a monopoly?
A firm that is the only one in the market, i.e., no firm produces a close substitute. As a result, a monopoly does not lose all its demand when it raises price above marginal cost: it has market power. A monopoly picks a point on the market demand curve.
A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.
Only one single seller in the market. There is no competition.
There are many buyers in the market.
The firm enjoys abnormal profits.
The seller controls the prices in that particular product or service and is the price maker.
Consumers don’t have perfect information.
There are barriers to entry. These barriers many be natural or artificial.
The product does not have close substitutes.
2.3 Advantages of monopoly
Monopoly avoids duplication and hence wastage of resources.
A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers.
Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly.
Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network.
Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition.
Now assume the taxi company operated in a monopolistic market.
Note that the taxi company can set the prices; the marginal revenue is no longer constant but declines with output.
Because of the taxi company having a monopoly they can set the prices and output. The firm has a diverging average and marginal revenue curve.
There are two types of profit(Ï€):
– Normal profits: the minimum the amount of money a firm must receive to carry on production of a given good. Normal profit is included as a cost.
– Abnormal profits occur when revenue exceeds costs so the profit is greater than 0 (so actual profit is made) so also when TR is greater than TC.
A monopoly firm is the sole seller in its market. Monopolies arise due to barriers to entry, including: government-granted monopolies, the control of a key resource, or economies of scale over the entire range of output. A monopoly firm faces a downward-sloping demand curve for its product. As a result, it must reduce price to sell a larger quantity, which causes marginal revenue to fall below price. Monopoly firms maximize profits by producing the quantity where marginal revenue equals marginal cost. But since marginal revenue is less than price, the monopoly price will be greater than marginal cost, leading to a deadweight loss. Policymakers may respond by regulating monopolies, using antitrust laws to promote competition, or by taking over the monopoly and running it. Due to problems with each of these options, the best option may be to take no action. Monopoly firms (and others with market power) try to raise their profits by charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination.
Economists assume there are a number of different buyers and sellers in the marketplace. This means that competition in the market allows for changes in price with changes in demand and supply. Furthermore, for almost every product, there are substitutes. Thus if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and supplier have equal ability to influence price. In some industries, there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility, and has have very little influence over price.
5.1.1 Perfect Competition
Perfect competition is a type of market in which there are large number of burgers and sellers. The sellers sell identical or homogeneous products. There is also free entry and exist of the firms. Both the buyers and sellers have perfect knowledge of the market.
Perfect competition is defined as a market in which there are many buyers and sellers, the product are homogeneous and sellers can easily enter and exit from the market.
Large number of buyers and sellers
Homogenous or standardized product
Free of entry and exit
Role of non-price competition: Perfect knowledge of the market
Absence of transport cost
5.1.4 Advantages of Perfect Competition
Optimal allocation of resources
competition encourages efficiency
consumers charged a lower price
responsive to consumer wishes: Change in demand, leads extra supply
5.2.0 Monopolistic Competition
The word monopolistic competition seems to come from the combination of monopoly and perfect competition. Monopolistic competition has some characteristics of perfect competition and monopoly.
Monopolistic competition is a market structure in which there are large numbers of small sellers selling differentiated product but these are close substitute products and have easy entry into and exit from the market.
Large number of sellers and buyers
Easy entry and exits
5.2.3 Advantages of Monopolistic Competition
The Promotion of Competition (lack of Barriers to Entry)
Differentiation Brings Greater Consumer Choice and Variety
Product and Service Quality – Development
Consumers Become More Knowledgeable of Products
An oligopoly market has some unique characteristics that can differentiate it from other market.
Oligopoly is a market structure in which there are only a few firms selling either standardized or differentiated product and it restricts the entry into and exit from the market. Some or all the firms in the industry can earn abnormal profits in the long run.
Few numbers of firms
Homogeneous or differentiated product
Barriers to entry
5.3.3 Advantages of Oligopoly
Big Businesses Gain Massive Profits
Ability to Determine Prices
Long Term Profits
The word monopoly is a Latin word, where ‘mono’ means single and ‘poly’ means sellers.
Monopoly is a market structure in which there is a single seller and large number of buyers and selling products that have no close substitution and have a high entry and exit barrier.
One seller and large number of buyers
No close substitution
Restriction of entry of new firms
5.4.3 Advantages of monopoly
Stability of prices
Source of revenue for the government
Monopoly firms offer some services effectively and efficiently.
Some companies have a monopoly in an industry, meaning that they have no competition. Monopolies are established and protected by the existence of barriers to entry of some kind. Monopolists can make long-run economic profits. Compared to a perfectly competitive firm, a monopolist will produce fewer units of a good and charge a higher price. This creates a deadweight loss, which reduces total surplus. You can calculate a monopolist’s profit or loss from a graph by finding the price of each good it sells the quantity of goods sold and the average total cost per good. Because monopolists don’t have any competition, sometimes they become lazy and allow costs to rise. This X-inefficiency is bad for the shareholders of the company. In a monopolistically competitive market, there are many firms, selling differentiated products, with minimal long-run barriers to entry. Firms in this market cannot make long-run economic profits. However, firms can use advertising to increase demand for their product and earn a higher return on their money. In an oligopoly, there are a small number of firms that make interdependent decisions and are protected by significant barriers to entry. An oligopoly can either take the form of a contestable market, where firms compete, or a cartel, where firms limit production with quotas and collectively behave like a monopoly.