Diagram of Monopoly

Monopoly Graph



  • A Monopolist is a price maker because he does not face any competitors. Therefore demand is price inelastic.
  • A monopolist will seek to maximise profits by setting output where MR = MC
  • This will be at output Qm and Price Pm.
  • If the market was competitive the price would be lower and output higher.

Disadvantages of a Monopoly


  • Green area = Supernormal Profit (AR-AC) Q
  • Pink area = Deadweight welfare loss (combined loss of producer and consumer surplus) compared to competitive market
  • 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.

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Page created by: Tejvan Pettinger,November 28, 2012