Monopolies

Quick revise

Monopoly – this is where there is a single producer in the market

Features:

  • One producer is able to charge relatively high prices
  • New products are rarely introduced
  • Resources are not used efficiently
  • Monopolies have market power
  • Monopolies are able to set prices

Monopolies are price setters –they are able to set the price for the whole market. Some markets are considered to have “natural monopolies” in this case having one producer is seen as the ideal.

If a natural monopoly occurs then to ensure resource allocation is efficient they need to be monitored by a regulatory body or watchdog e.g. OFTEL and British Telecom

Advantages of a Monopoly
  • As monopolies often operate on an immense scale they can exploit economies of scale
  • Economies of scale occur when output increases and unit costs decrease
  • These cost reductions will lead to a decrease in costs and increase in profits for the monopoly producer
  • However some of the gains in productive efficiency may be transferred to the consumer in the forms of profits
  • Government regulation of monopolies means annual price increases can be controlled
  • Some of the monopolies profits may be used to invest in research and development
  • This expenditure on innovation and invention could lead to efficiency gains in the market
  • If a firm is operating as a domestic monopoly but is open to international competition their market power will be limited and they will therefore have to charge lower prices
Disadvantages of a Monopoly
  • It is argued that monopolies producer at a lower output with higher prices than a producer in a competitive market would
  • This leads to a reduction in the consumer surplus and an increase in producer surplus
  • Supernormal profits are earned by the monopoly at the expense of allocative efficiency
  • The lack of any competition in the market can increase inefficiency as customers are stripped of the ability to choose
  • Dynamic efficiency may be lost if monopolist limits consumer choice and innovates less
Monopolies and Resource Allocation

Monopolies are viewed as a form of market failure as they do not allocate resources as efficiently as in perfect competition

As the consumer surplus is reduced this is seen as inefficiency and an example of where the market has failed to allocate resources in the optimum way

Example Questions

“In the UK many argue that the large supermarkets behave like monopolists” Using your economic knowledge describe the impact of a monopoly on consumers. (15 marks)

Mark Scheme

Level 1 Doesn’t identify any issues. Shows little understanding of economics. Lacks evaluation and analysis. Question not answered adequately. Few, if any, relevant issues are recognised. Economic concepts and principles are 0 to 3 marks

Level 2 Identifies at least one issues. Uses basic economics to answer the question. Some identification of different points of view but evaluation is lacking or very basic. Answer lacks clear structure and fails to fully understand the question. or more relevant issues are recognised. Basic terminology may be used. 4 to 6 marks

Level 3 At least two issues identified. Economic concept and ideas are applied and understanding is demonstrated. Looks at alternative viewpoints and evaluates key issues / arguments. Uses key economic terms. 7 to 10 marks

Level 4 Shows a good understanding of economic concepts and models which are used to help answer the question. Demonstrates an understanding of different view points which enables evaluation of the issues and arguments. Conclusions are drawn. 11 to 13 marks

Level 5 Identifies at least three issues. Demonstrates a good understanding of economic models and concepts which are applied to help answer the question. Looks at alternative points of view. Uses theory to help evaluate key issues and support conclusions. 14 to 15 marks

This video investigates the question, "Is Monopoly bad". It looks at what the economic arguments for and against this market structure.