characteristics of monopoly
There is only one firm in the industry, the monopolist.
There are substantial barriers to entry.
The monopolist is a short run profit maximiser.
the government and other agencies call firms who have more than 25% of any
particular market a monopoly.
can be national (royal mail), regional (water companies) or local (petrol
downward sloping demand curve for the industry must also be the demand curve
for the firm. This gives the monopolist the power to be a price maker, he can
set the price and then sell whatever quantity consumers are willing to buy at
that price. Rather than setting the price, he can set the quantity he wishes
to sell and then accept the price the market is willing to pay.
the monopolist would like to be able to sell a large quantity at a high
price, however it can only set one or the other.
It is because of this we say that the monopolist is constrained by the
demand curve, as shown overleaf.
curve is relatively inelastic as there are no substitutes available.
three possible outcomes, abnormal profits, normal profits and losses.
Abnormal profits (AR>AC)
Normal profits (AR=AC)
Losses (AR less than AC).
persist in the long run the monopolist will leave the market (unless it
receives a subsidy or it has an objective other than making a profit).
abnormal or normal profits are being earned, the monopolist will remain in
the market in the long run. Unlike perfect competition, it is possible to
earn abnormal profits in the long run due to the presence of barriers to
entry, which prevent firms entering the industry and eroding the profits.
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