Diagram of Monopoly

 

Monopoly Graph

• A Monopolist is a price maker because he does not face any competitors
• A monopolist will seek to maximise profits by setting output where MR = MC
• This will be at output Qm and Price Pm.

 

Disadvantages of a Monopoly

 

• Higher Prices Higher Price and Lower Output than under Perfect Competition. This leads to a decline in consumer surplus and a deadweight welfare loss

• Allocative Inefficiency. A monopoly is allocatively inefficient because in monopoly the price is greater than MC. P> MC. In a competitive market the price would be lower and more consumers would benefit

• Productive Inefficiency A monopoly is productively inefficient because it is not the lowest point on the AC curve.
  
  
• X - Inefficiency. - It is argued that a monopoly has less incentive to cut costs because it doesn't face competition from other firms.Therefore the AC curve is higher than it should be.

• Supernormal Profit. A Monopolist makes Supernormal Profit Qm * (AR – AC ) leading to an unequal distribution of income.
  
  
• Higher Prices to Suppliers - A monopoly may use its market power and pay lower prices to its suppliers. E.g. Supermarkets have been criticised for paying low prices to farmers.

• Diseconomies of Scale - It is possible that if a monopoly gets too big it may experience diseconomies of scale. - higher average costs because it gets too big
  
  
• Worse products Lack of competition may also lead to improved product innovation.
  
  
• Charge Higher prices to suppliers. Monopolies may use their supernormal profits to charge higher prices to suppliers.

Blog Entry

• Does Microsoft have too much monopoly power?
• Are monopolies always bad?

 

Essays and Revision Notes on Market Structure

• Perfect Competition
• Efficiency of Perfect Competition
• Monopolies
• Monopoly Diagram
• Advantages of Monopoly

 

See also Competition Policy