a market structure in which there is only one seller of a good or service that has no close substitutes and entry to the market is completely blocked. Monopoly: a market structure in which there is only one seller of a good or service that has no close substitutes and entry to the market is completely blocked.

Consists of a single firm Therefore, market demand = monopolist’s demand Downward sloping demand curve Can fix price at which it sells product Quantity sold depends on the market demand.

Depends on how narrowly the industry or market is defined. * Global markets * National markets * Regional markets * Local markets Services Services usually have narrower markets – why? Only a monopolist if entry into the market is blocked.

profit-maximising rule Produce where MR = MC - profit-maximising rule shut-down rule Provided that AR > AVC (short run) or AC (long run) - shut-down rule * Cost structure same as any other firm. * Revenue structure differs from perfectly competitive firm.

* Monopolist is only supplier of a product * Demand curve for product = market demand curve for market * Downward sloping demand curve means additional quantity of output only sold if price lowered * Lower price applies to all units of output * Therefore MR from sale of extra unit < price at which all units of the product are sold

* The price which consumers are willing and able to pay - indicated by the demand curve. * MR = MC at a price of P 1.

* Compare AC with AR or TC with TR at profit maximising point * AR > AC at Q 1 therefore economic profit earned (C 1 P 1 M 1 K 1 )

* Perfect competition * Perfect competition - economic profit competed away in LR. * Monopoly * Monopoly - entry blocked economic profits can continue in LR. * Can achieve economies of scale - ↓ average cost curve * Firm will produce where MR = long-run MC.

* Monopolist chooses combination of price/output where profit is maximised. * Subject to the demand constraint. * Monopolist is a price maker - does not move along supply curve as price of the product changes.

same product different consumers different prices * Profitable to sell same product to different consumers at different prices. buyers’ valuationscost differences * Only occurs when price differences are based on different buyers’ valuations. NOT based on cost differences. * Attempts to capture all/part of consumer surplus.

Firm must be a price maker/setter * Won’t work in perfect competition Consumers/markets must be independent * Consumers in the low-priced market must not be able to resell at higher prices. * Must be able to divide the market. * Easier for services.

1 st degree price discrimination (discrimination among units) * Each consumer charged maximum price they are prepared to pay. higher * Only done if firm can obtain higher price than equilibrium market price. * Perfect price discrimination = consumer surplus eliminated.

2 nd degree price discrimination (discrimination among quantities) * Firm charges customers different prices according to how much they purchase.

3 rd degree price discrimination (discrimination among buyers) * 2 or more independent markets - separate price charged in each market * PED must differ between the different markets

a situation that arises where it is most cost efficient for a single firm to produce all the output in an industry or market. Natural monopoly: a situation that arises where it is most cost efficient for a single firm to produce all the output in an industry or market.

Even when P = 0, D ≠ minimum AC (max economies of scale). Even when 1 firm supplies all output, still not operating at minimum efficient scale. More than one firm = higher average cost of production. Eg’s: public utilities like electricity and water.

Possibility of inefficient levels of production and large economic profits. Two options… * Government can produce the good itself. * Leave production to a private firm, government regulates.

Where should the price be set? * Allocative efficiency * Allocative efficiency when P = MC * Productive efficiency * Productive efficiency where AC is minimum. * Productive efficiency cannot be reached therefore P = MC to ensure allocative efficiency. * This is called the marginal pricing rule.

1. Government supply good/service - tax revenue compensates for losses. 2. Leave production to private firm and gov. subsidise losses. 3. Average cost pricing (P = AC). Normal profit earned, no subsidisation would be necessary. 3. Average cost pricing (P = AC). Normal profit earned, no subsidisation would be necessary.  AC pricing gives no incentive to minimise costs. Higher costs will = higher prices. Also disadv. of 1 & Price discrimination. Supplier captures consumer surplus in certain market segments and uses this to subsidise consumers in other market segments.