Microeconomics Topic 9: Monopoly by

Type of barrier to entry

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

A barrier to entry are obstacles that make it difficult or even impossible for new firms to enter the market
The barriers can be imposed legally or exist naturally
The government can impose license to restrict entry into a market
If a firm wants to enter the market, he must register for a franchise. He will be using the name of the original company. (This is not considered having a new firm)
The government also grant patents to inventors for a specific time period. This legally ban other firms from selling their products.
A monopolist is likely to achieve a low average cost because of economies of scale. Since he entered the market early and there is no competitors, he can increase all his inputs and experience economies of scale. Other firms will not enter the market because they know they will lose out to the monopolist who has a low cost of production.
A firm may have exclusive rights to the ownership of resources required to produce a good. Hence, they are the only seller in the market.

A single firm selling a unique product

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

With only one seller in place, the market demand curve is the monopolist's demand curve.
The demand curve is negatively sloped with a steep gradient. This is because the monopolist sells a unique product. Therefore, the demand is inelastic because there is no perfect substitutes to the product.
A monopolist is a price maker. He has market power and he can influence the price or the quantity sold. The monopolist's market power is obtained from its size and the fact that it sells a unique product
Note that the monopolist can only fix either the price or the quantity, not both. Despite his market power, he is still constraint by the market demand. If he sets the price, the market demand will determine the quantity; if he sets the quantity, the market demand will determine the price

Economic loss

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

When MR=MC and PThe monopolist ought to look at his variable cost of production to determine if he should continue operation or cease operation in the short run

Economic profit

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

When MR=MC and P>ATC, the monopolist will earn an economic profit. He should produce when he is making an economic profit because the price can cover all the cost.

Strong barriers to entry

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

With a barrier to entry, the monopolist can enjoy economic profit even in the long run

Normal Profit

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

When MR=MC and P=ATC, the monopolist will earn a normal profit. He should produce when he is making a normal profit because the total revenue can cover all the total cost

Demand and revenue of a monopolist

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

The monopolist's demand curve is the market demand curve since he is the only seller.
The Demand = Price = Average Revenue
However, Average Revenue is not equal to the Marginal Revenue
This is because when the monopolist wants to adjust the price, he adjust the price for all outputs sold. When he increase the price, he will lose some buyers. So the marginal revenue is lower than the average revenue
The marginal revenue curve is the derivative of the total revenue curve. The marginal revenue curve is twice as steep as the average revenue curve.

Profit maximisation in monopoly

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

The monopolist wants to maximise profit like other market structures. As usual, when MR=MC, that is the maximum profit
In the short run, the monopolist can make an economic profit, a normal profit or an economic loss

What is a monopoly

ronaldoyee_161 — 2017-08-02 21:55:05 UTC

Monopoly is the market structure that is the extreme opposite of perfect competition.
In other words, a monopoly has only 1 seller who sells a unique product. The barriers to entry is strong

If P>AVC for an economic loss

ronaldoyee_161 — 2017-08-02 23:02:36 UTC

The monopolist should continue operation because he can cover all the AVC and a small portion of the AFC; if he cease operation, he will incur the AFC which is larger in this situation

If P
ronaldoyee_161 — 2017-08-03 09:57:03 UTC

The monopolist should cease operation because he cannot even cover up all the variable cost. He will incur the uncovered portion of the variable cost and the fixed cost if he continue operation; if he cease operation, he only incur the fixed cost, which is smaller in this case

P=AVC for an economic loss

ronaldoyee_161 — 2017-08-03 09:59:13 UTC

The monopolist can choose to continue operation or cease operation. Regardless of choice, he will incur the fixed cost in this situation

Long run equilibrium in monopoly

ronaldoyee_161 — 2017-08-03 10:00:06 UTC

The monopolist will leave the market if he is making losses, ruling out the possibility of making an economic loss in the long run.
It is possible for a monopolist to earn economic profit in the long run. This is because the strong barrier to entry will prevent any firms from entering the market.
In short, a monopolist can earn either an economic profit or a normal profit in the long run

Perfect Competition and Monopoly compared

ronaldoyee_161 — 2017-08-03 10:04:25 UTC

In a situation where both the perfect competition firm and the monopoly firm earn normal profit in the long run, the monopolist will sell lesser at a higher price than the perfectly competitive firm. A monopolist cannot produce at the lowest cost because the demand curve is downward sloping. Therefore, the tangent of the average cost curve ,or the demand curve, should be to the left of the lowest average cost.