IB ECONOMICS Unit 2 Micro Economics CH9: Monopoly.

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Presentation transcript:

IB ECONOMICS Unit 2 Micro Economics CH9: Monopoly

source: | 11th Nov 2009http://news.bbc.co.uk/2/hi/business/ stm

Assumptions of the model There is one firm producing the product, the firm therefore is the industry Barriers to entry and exit exist in the market which maintains the monopoly into the LR Due to the barriers to entry monopolies can enjoy abnormal profits in the LR (or suffer losses in the LR)

Sources of monopoly power/barriers to entry Economies of scale Natural monopolies Legal barriers Brand loyalty Anti-competitive behaviour

Profit maximisation under monopoly CLASS TASK Complete the diagram to show a firm making abnormal profits

Loss minimisation under monopoly CLASS TASK Complete the diagram to show a firm making a loss

Are monopolies efficient? NotNot productively efficient –But producing more for less? NotNot allocatively efficient Possibly dynamically efficient

Welfare loss of Monopoly

More QD at a lower P than PC with abnormal profit

Are monopolies in the public interest? Possible advantages Economies of scale and MES Research and development Dynamic efficiency International competitiveness Price discrimination Improved quality Cross subsidisation Less choice may be better? Creative destruction Possible disadvantages Diseconomies of scale Allocative efficiency Regressive effects X inefficiency Collusion False choices

Evaluation

Extended Reading Sloman J., Essentials of Economics 4 th Ed. –P119 to 127 There are also a number of new books in the library which will be excellent reading for this section of the course