Monopolistic competition Concentrated markets Monopolistic competition

Recap on the conditions that exist in a perfectly competitive market. A large numbers of buyers and sellers. Buyers or sellers cannot influence the ruling market price by their own actions. All buyers and seller can trade as much as they want at the ruling market price. All buyers and sellers possess perfect market information. Their exists freedom of entry and exit to and from the market. Individuals firm’s products are homogenous (uniform).

1. The conditions for monopoly. The total output of the industry is in the hands of a single firm. Barriers to entry restrict other firms from entering the market. Patents Copyright Nationalised industries Economies of scale Limit pricing Legal monopolies (government sanctioned) Natural monopolies

The determination of price and output in a monopoly The monopolist’s revenue Despite being the only supplier in the market, the monopolist will face a downward sloping demand curve. This can be explained by the condition for perfect competition which is not satisfied in concentrated markets. That is that:- Buyers and seller cannot trade as much as they wish at the ruling market price. P P/AR=50 MR=30 D=AR Quantity AR/P TR MR 1 70 2 60 120 50 3 150 30 MR Q=3 Q

The determination of price and output in a monopoly The monopolist’s profit maximisation output MR=MC, that is the point at which the marginal cost of producing a good or service is equal to the revenue received from its sale. In this case the extra unit cost the monopolist £30. The amount received however, was £45 P MC P/AR=45 MR/MC=30 D=AR MR Q=3 Q

The determination of price and output in a monopoly The monopolist and supernormal profits The extra unit cost the monopolist £30. The amount received however, was £50. The monopolist will ensure the AR/P> ATC. In this case the unit cost of production at the profit maximising point is £40. The monopolist is making £20 on the MC of production (£50-£30). In terms of ATC, £10 profit is made on each unit (£50-£40). P MC ATC P/AR=50 ATC=40 MC=30 D=AR MR Q=3 Q

3. The range of monopoly outputs MR =MC (profit maximisation) MR=0 (revenue maximisation) AR=MC (welfare maximisation/ allocative efficiency, the point at which the cost of producing the extra unit is equal to the revenue the firm receives from that extra unit. Alternatively the cost of the resources used to produce that extra unit is equal to the price charged for that unit). AR=ATC (normal profit), the minimum price a monopolist will accept in order to stay in the market. P MC ATC D=AR MR A B C D Q