A Monopoly is a market structure in which there is either only one producer or seller in the market. The one firm produces the goods for a particular sector/industry. Entry is typically restricted due to high costs or other barriers, which may be economic, social or political. Since the firm is the sole supplier there is no distinction between the firm and the industry, so the firm’s demand curve is also the industry’s demand curve.
Assumptions of a monopoly are:
1. There is only one firm
2. The single product produced has no close substitute.
3. Information is not freely available to firms interested in entering the industry.
4. There are barriers to entry of new firms.
5. Monopolists are price makers – a negatively shaped demand curve.
6. Inefficient producer – waste of scare resources.
7. Makes Super Normal Profits.
Diagram of LR equilibrium of Monopoly.
• Occurs at point Qm where
• MC = MR and MC is rising and cuts MR from below.
2. Price charge & /Output produced
• The firm produces output Qm and sells it at price Pm on the market
3. Cost of production
• The cost of producing this output shown at point AC.
4. Super Normal Profits.
• This firm is earning SNP’s – represented by the shaded area above.
• They are earning SNP’s because AR > AC and
• They can continue to earn SNP’s because barriers to entry exist..
5. Waste of Scarce Resources
• Because the firm is not producing at the lowest point of the AC curve it is wasting scarce resources.