Question 3 : In what ways could a monopoly be (a) more efficient (b) less efficient than several firms competing against each other? Discuss this statement with the use of appropriate diagrams.

Monopoly
Characteristics of a monopoly

Single seller No close substitutes for the product
High barriers to entry – potential competitors can be prevented entering the industry through: economies of scale ownership of scarce resources legal barriers

Effect of these characteristics

Because the monopoly firm is the only supplier of the product, the monopoly is called a price maker and can influence the price by varying the amount of output it supplies to the market
The demand curve is the downward sloping market demand curve compare with perfectly competitive firm’s demand curve

Marginal revenue and elasticity

Marginal revenue for a monopoly is related to the elasticity of demand for its good
A profit maximising monopolist will never produce at an output in the inelastic range of its demand curve Why not? It could charge a higher price, produce less and earn a larger profit. Recall: Total Revenue = price x quantity Inelastic demand: ­ price to ­ TR

The monopolist’s decision

How much to produce and at what price?
As with a perfectly competitive firm, a monopolist will employ the profit maximising rule:
Choose the output level at which MR = MC
Set the price based on demand for that level of output

Profit maximisation under monopoly

Barriers to entry allow the monopolist to protect its market from competition.
Economic profits can be earned in the short-run AND long-run.

Monopoly vs. perfect competition

Perfect