1. Monopoly
Single seller – 100% of the market (may exert same market power with >25%)
Barriers to entry keep competition to a minimum
Firms control price (price setter) and earn super-normal profits
Natural monopoly may exist in some industries
Firms practise price discrimination

2. Barriers to Entry (a reminder):
High Start-Up Costs
Economies of Scale
Limit Pricing
Control of Outlets or Suppliers
Brand Loyalty – sunk costs
Patents, Copyrights, Licensing
Natural monopoly characteristics (enormous infrastructure)

3. Monopoly – The Curves!
Price £ MC AC
P profit max AC
AR = D MR
Q profit max
Quantity
Profit maximising output is where MC = MR (once output is set, P determined by the demand curve)
AC < AR (P) at profit maximising output
Therefore, supernormal profits exist (however losses are possible if demand falls or costs rise)

4. Monopoly Efficiency   Allocative Efficiency Since P ≠ MC; (P>MC)
Productive Efficiency
Q is not at min AC.
Dynamic Efficiency 
Little incentive to decrease costs since price can be increased
May choose to constantly improve to keep out potential competitors
X-inefficiency
Without competition, firms can become very bureaucratic & too management heavy – slowing things down

5. Natural Monopoly
Price £
P profit max AC AC MC MR
AR = D
Q profit max
Quantity
AC falls constantly (constant increasing returns to scale due to high sunk costs)
Profit max. output where MR = MC
At Q profit max, P is determined by the demand curve
P (AR) > AC, therefore supernormal profits

6. Price Discrimination
Firms charge different prices to different groups of consumers for the same product (Eg. peak/off peak train fares, same clothes/different shop)
Monopoly power must be great enough to not risk being undercut by rivals
Must be able to prevent re-selling of product in 2nd hand market (arbitrage)
Groups must have different elasticities of demand (the more inelastic, the higher the price)

7. Price Discrimination – The Curves
Market A
Market B
Whole Mkt MC PA AC PB
ARB
MRB MR
MRA
ARA QA QB
Q profit max
Quantity
P in each market is determined by the demand curve
Q in each market is determined by where MC = MR
Firms try to capture all the consumer surplus, turning it into producer surplus

8. Monopoly Bad
Monopoly Good
Consumers face higher prices & less choice (↓ consumer surplus & ↓ consumer welfare)
Lower income consumers may be priced into the market by price discrimination
Firms may have no incentive to innovate or become more efficient
Large firms may be able to take advantage of Economies of Scale
New market entrants may be stifled by monopoly power, reducing long-term progress
Large firms may be more internationally competitive improving exports for the country

9. A note about shifting cost curves…
Since MC is only related to variable costs, MC will only shift if VCs change
So…
If Fixed Costs change, shift only the AC curve
If Variable Costs change, shift both AC and MC curves