1. Monopoly
JENNIE HARRINGTON

2. Monopoly Assumptions
 One firm is the industry
 One firm exists within the industry so there is no distinction between the
firm and the industry.
 Controls price or output
 A firm can control price or output but not both
 If it sets the price, the output produced will be determined by consumers
 If it sets the output the price will be determined by the market
 Profit maximisation
 It is possible for the firm to earn SNP’s in both the short run and the long
run
 Barriers to entry
 If a monopoly market structure is to continue into existence into the long
run there cannot be freedom of entry and exit.

3. Relationship between AR and MR
Quantity AR TR MR
1 €10 €10 -
2 €9 €18 €8
3 €8 €24 €6
4 €7 €28 €4
5 €6 €30 €2

4. The relationship between AR & MR
P There is no distinction b/w
The firm and the industry as there
Is only one firm in the industry.
In order to sell more of its product
The firm will have to decrease its
AR. MR decreases at a faster rate
Than AR and it is less than AR
AR
MR
Q

5. Long Run Equilibrium
AC

6. Long Run Equilibrium for a firm in Monopoly
 Equilibrium
 Occurs at pt _, where MC = MR, MC is rising
 Price/ Output
 The firm produces Q1 and sells it at P1
 Profits
 AR>AC, SNP’s are being earned in the box _______. They can
continue to exist due to barriers to entry
 Costs
 The cost of producing the output is shown at pt __. The firm is
not producing at the lowest point on the AC curve. Hence, the
firm is wasting scarce resources/ inefficiency

7. Barriers to entry
 Legal/ Statutory Monopoly
 Other firms may not be allowed into the industry because the government
confers on a firm the sole right to supply a particular good or service I.e. Aer
Rianta
 Ownership of a patent/ copyright
 If a firm has the sole right to a manufacturing process then no other firm can
compete with it. Other firms are not allowed to use this patent until the time
period has expired
 Sole right to raw materials/ Natural monopolies
 A firm may have complete control over the source of essential raw materials
I.e. an oil drilling company
 Large capital investment
 In some industries the minimum size of a firm required to operate efficiently
is so large that there is no room for competitors once one firm has
established itself.

8.  Trade agreements/ collusion – cartels
 By entering trade agreements with other firms, a firm can share out the
market so that no competition exists within its segment of the market
 Mergers/ takeovers
 A firm may ensure their survival by merging/ taking over other (rival) firms
in the same line of business – such that it becomes a monopolist and no
competition exists within the industry
 Monopolies based on fear, force or threats
 An individual/ firm may stop other individuals/ firms providing similar
goods/ services by threats/ force instilling fear into potential entrants I.e.
the supply of illegal drugs
 Brand proliferation
 A firm may gain monopoly power if through its advertising consumers are
convinced that there is no suitable alternative to their particular brands

9. Advantages of Monopoly
 Economies of scale
 Production on a large scale may help the firm benefit from economies of
scale and these cost savings may be passed on to the consumer in the form of
______________
 Employment
 may be more secure with monopoly. A monopolist may be less vulnerable to
changes in the level of demand in the market as it earns SNP’s., Also
employees may benefit
_____________________________________________________
___________________________________________________
 Guarantee supply of product/ service
 The supply of a product may be guaranteed and provided where profit is
minimal so consumers benefit e.g. _____________________________
 Reduced use of scarce resources
 ___________________________________________________
 Potential for innovation
 ____________________________________________________

10. Disadvantages of Monopoly
 Cost:
 the monopolist will seldom produce at the__________ point on the AC
curve
 Profits:
 ___________ are being earned indicating that the consumer is being
exploited (AR> AC)
 Consumer has no ______–
 as there are no other producers of the product
 A monopolist may be able to practice price discrimination
 Where a good is sold to different consumers at different prices where the
price difference is not due to difference in the cost of production
 Monopolists can control either the_______ it sells at or the
__________ it will supply. The monopolist will usually cut its
production level to increase the price of the good, thus under
utilising its resources

11. Make suggestions as to how semi-state companies
which are monopolists can be made more cost effective
 Avoid any gov. interference in the day to day running of the
company.
 Introduce competition in that particular industry by
introducing deregulation. Competition normally
encourages cost efficiency.
 Introduce a profit motive for the mgt team.
 Appoint experienced entrepreneurs and highly qualified
people as members of the BOD. This replaces people being
appointed solely for their allegiance to a particular political
party and who may not have any business experience/
knowledge.

12. Comparing LR Perfect Competition and Monopoly
 Price/ Output
 PC
 M
 Profits
 PC
 M
 Cost
 PC
 M

13. Do consumers fare better if a product is produced
under conditions of monopoly or PC – explain..
Profit
Price
Cost

14. Are employees better off working in a perfectly
competitive industry or in a monopolistic industry?