10/13/2023 0 Comments Natural monopoly graphPrice discrimination in a monopoly occurs when the firm charges a different price to different consumers. Producers sell less units at a higher price than a competitive market, creating deadweight loss, consumer and producer surplus. When the price is exceeding the firms marginal cost, the consumer pays a higher price than in a perfectly competitive market. To maximize profit, the price is set where production level falls on the demand curve. Since the price of the product in a monopoly is higher than the marginal cost, the market becomes allocative inefficient.Īs a price setter, a monopoly gets to charge whatever they want without market influence. This results a less quantities produced than a perfectly competitive market would produce, and the producers supply their goods below their manufacturing capacity. A monopoly market maximizes production to where their MC equals MR. Monopolies are less efficient than perfectly competitive markets and are productively inefficient. Smaller firms with a lower output have a higher average cost, and are unlikely to survive in the industry. As seen in the graph, if the firm increases output to Q1, it will have lower average cost. The more products they produce in that factory, the lower their average cost per unit will be. Apple built a factory at a high fixed capital cost to build its products. To put this better in contest let’s look at an example. The economic of scale in a monopoly (AR in the graph) is where the output increases and the long run average cost falls. In other words, the output will be where MC = MR, given that price is above ATC at Q, a long run super-normal profit is possible. Product differentiation – distinguishes its products or services from the competitionĪ monopoly is a profit maximizer because it equalizes its marginal revenue with marginal cost.Price discrimination – can charge different prices to different clients.Single seller – one seller with many buyers.High barriers to entry – normally requires high startup cost.Price maker – they set the price for lack of competition.Profit maximizer – by raising cost and producing less then social optimum output.What are the Characteristics of a Monopoly? Here are the most common characteristics of a monopoly. To recognize a monopolistic market structure, it is important to know the characteristics. It is the opposite of an oligopoly, which is a market structure in which one buyer has many sellers. Another difference is that the competition between monopolies is in product differentiation rather than in price competition. A monopoly can violate antitrust laws when it destroys the competition or the ability of other companies to enter the market.Ī monopoly is different from a perfectly competitive market, given that it has very low to no competition. Merging companies reduces competition, and if the merger creates a market share of 25% or more of the total market, a monopoly is formed. Monopolies can also be created by merging two or more companies. To decrease the potential to exploit this monopoly power, governments tend to either nationalize or regulate natural monopolies. This eliminates competition because it makes it almost impossible for new firms to enter the market. Sometimes the government grants a firm a monopoly status in specific areas such as the post office, or the government grants a patent to one specific company, granting monopoly power to companies such as Microsoft or other digital media, design, characters or images.Ī natural monopoly is when there is extreme high fixed cost of distribution, or when large-scale infrastructure is required to ensure supply such as cables for electricity supply. When a firm has exclusive ownership of a certain resource, it has monopoly power over that resource and therefore it is the only firm that can exploit that resource. In legal terms, a monopoly power exists when a single firm controls about 25% or more of the market. Pure monopolistic companies rarely exist. What is a Monopoly?Ī monopoly is a market structure where one company or seller has complete control over the market, and has very limited to no competition, often resulting in high prices and low quality products. Are you preparing for your AP® Microeconomics exam and need to reinforce your understanding of the different market structures? In this AP® Microeconomics monopoly crash course review, you will learn about the monopoly market structure with examples, and practice the graph to better understand the industry.
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