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sellers
Number
Types of
and size
goods
and
Market of buyers
and
services
sellers
Transparency
of information
Market
Structure
Perfect Imperfect
Q1 Q2 Output/Sales
Imperfect Market
Characteristics:
Large number of firms in the industry
May have some element of control over price due to
the fact that they are able to differentiate their
product in some way from their rivals – products are
therefore close, but not perfect, substitutes
Entry and exit from the industry is relatively easy – few
barriers to entry and exit
Consumer and producer knowledge imperfect
Monopoly Characte
-ristics:
New firms
are
difficult
to enter
One Owns
producer patent or
or seller copyright
No
Operations available
substitute
are under
for the
economies product
of scale they
produced
Has Controls
the
control
supply of
over the raw
price materials
Classifications of monopoly:
Natural Monopoly Legal monopoly Coercive Monopoly
single firm can “de jure” existence as a sole
supply the entire government grants producer or
market due to the to the private distributor is by
fundamental cost individual or firm means of coercion
of the structure over the product or (legal or illegal)
Capital cost is large the service Violates price
enough compared principle of free
to variable cost market to avoid
Have cost competition
advantage over
competitors
Short –run Analysis of Monopoly
Welfare
implications of
monopolies
MC
The price in a competitive
market would be £3 with
AC outputAlevels at Q1.at the diagram for
look back
Loss of consumer perfect competition will reveal
surplus that in equilibrium, price will be
equal to the MC of production.
We can look therefore at a
comparison of the differences
between price and output in a
competitive
The higher price andsituation
lower compared
to a monopoly.
output means that consumer
surplus is reduced, indicated by
the grey
The shaded
monopoly area.
price would be
£7 per unit with output levels
lower at Q2.
AR
MR On the face of it, consumers
face higher prices and less
Q2 Q1 choice in monopoly conditions
compared to more competitive
environments.
Welfare
implications of
monopolies
The monopolist will be
affected by a loss of producer
£7 surplus shown by the grey
triangle but……..
MC The monopolist will benefit
from additional producer
surplus equal to the grey
£3
AC shaded rectangle.
Gain in producer
surplus
Output / Sales
AR
MR
Q2 Q1
Long- run Analysis of Monopoly
Welfare
Costs / Revenue implications of
monopolies
MC
£7 The value of the grey shaded
AC triangle represents the total
welfare loss to society –
sometimes referred to as
the ‘deadweight welfare loss’.
£3
AR
MR
Output / Sales
Q2 Q1
Oligopoly
Product Limited
Variation control
and over the
Promotion price
New
firms can
enter
easily
Monopolistic or Imperfect Competition
This is a short run equilibrium
MC position for a firm in a
monopolistic market
Cost/Revenue
structure.
This is a short run equilibrium
position for a firm in a
AC monopolistic market
structure.
£1.00
We assume that the firm
produces where MR = MC
Abnormal Profit (profit maximising output).
At this output level, AR>AC
and the firmthe
Since makesadditional
£0.60
abnormal profit (the grey
revenue received from
shaded area).
each unit sold falls, the
MR curve lies under the
The demand curve facing
AR curve.
the firm will be downward
sloping and represents
Marginalthe
Cost and
AR1 D (AR)
MR1 MR
Q1 Output / Sales
Monopolistic or Imperfect Competition
MC
Cost/Revenue Because there is relative
freedom of entry and exit
into the market, new
firms will enter
AC encouraged by the
existence of abnormal
profits. New entrants will
increase supply causing
price to fall. As price falls,
the AR and MR curves
shift inwards as revenue
from each sale is now
less.
Oligopsony Monopsony