1. What determines the behaviour of firms?
3.14 Operational Strategies: location
What determines the behaviour of firms?

2. 3.14 Operational Strategies: location
Syllabus
Candidates should be able to:
Define monopoly and explain the characteristics
Analyse diagrammatically and show the profit maximising equilibrium
Analyse third degree price discrimination (necessary conditions; diagrammatic analysis; costs and benefits to consumers and producers)
Evaluate the costs and benefits of monopoly to firms, consumers, employees and suppliers
Explain the concept of a natural monopoly

3. 3.14 Operational Strategies: location
Definitions
What is a monopoly?
This will mean that the demand curve for the monopolist is the _____ as the industry demand curve
In practice, in the UK a firm is said to have monopoly power if it has more than ____% of the market share. For example,

4. 3.14 Operational Strategies: location
Characteristics
Only ______ firm in the market (the monopolist) – they are the __________ producer for a good with no close substitutes
High ____________ to entry preventing new firms from entering the market
May make ________________ profits
The monopolist is a _______ run profit maximiser.
What does this mean?
barriers, one, short, sole, supernormal

5. 3.14 Operational Strategies: location
Examples of monopoly

6. Sources of monopoly power
3.14 Operational Strategies: location
Sources of monopoly power
How can a monopoly exist? What are the sources of its power?

7. Monopoly and abnormal profit diagram
3.14 Operational Strategies: location
Monopoly and abnormal profit diagram

8. Explanation of monopoly diagram
3.14 Operational Strategies: location
Explanation of monopoly diagram
Why is a monopoly firm the same as the industry?
What type of demand curve does a monopoly have?
What is the link between MR and AR?
MR is the gradient of _______
Total revenue is maximised when MR = _____
What profit will a monopolist make if AR > AC?

9. 3.14 Operational Strategies: location
Monopoly – benefits

10. 3.14 Operational Strategies: location
Monopoly – drawbacks

11. 3.14 Operational Strategies: location
Price discrimination
A monopoly may charge _______ price for all buyers. But it may use price discrimination: charging ___________ prices for the _______ good. This will ensure they have even higher _________ (higher producer surplus).
Third-degree price discrimination means charging a different __________ to different consumer groups.
E.g.
different, one, price, profits, same

12. Price discrimination and monopoly
3.14 Operational Strategies: location
Price discrimination and monopoly
Draw a diagram, mark on the profit maximising price and quantity and then mark on a higher and a lower price (and the corresponding quantity)

13. Reasons why buyers might accept price discrimination
3.14 Operational Strategies: location
Reasons why buyers might accept price discrimination
Price discrimination depends on buyers having different PED and so ______ prices will be charged to customers with high PED.

14. Conditions required for price discrimination
3.14 Operational Strategies: location
Conditions required for price discrimination
Firm must have market power, price discrimination can only take place if the firm can ________ the price.
The firm must have the information to be able to distinguish between different customers’ willingness to pay and different buyers have different demand curves (and so can be charged different _________)
Groups of buyers must be distinct and kept separate e.g. business customers can’t buy student tickets
Note that sometimes price discrimination may not work e.g.

15. Consumers and price discrimination – do they benefit?
3.14 Operational Strategies: location
Consumers and price discrimination – do they benefit?

16. Diagram for price discrimination
3.14 Operational Strategies: location
Diagram for price discrimination
Draw 3 diagrams with AR and MR; the 1st should show fairly inelastic demand, the 2nd fairly elastic demand and the 3rd combines the two.

17. Assumptions with price discrimination
3.14 Operational Strategies: location
Assumptions with price discrimination
The assumption is that there are two markets – one with inelastic demand and one with elastic demand. The ‘total firm’ diagram shows that a profit maximising firm will have price Pt and earn supernormal profit. Where MR=MC in the inelastic demand market this is profit maximising and gives price Pa and profit marked by the shaded area.
The elastic demand market sees price Pb and profit marked by the shaded area.
Combining these two profits should generate more profit for the firm than profit maximising without price discriminating.

18. Monopolies and productive efficiency
3.14 Operational Strategies: location
Monopolies and productive efficiency
A monopoly tends not to be productively efficient. When does productive efficiency occur?
What does it mean if a firm is productively efficient?
Why does a firm in a monopoly not need to be productively efficient?

19. Monopolies and allocative efficiency
3.14 Operational Strategies: location
Monopolies and allocative efficiency
When does allocative efficiency occur?
Why might a firm in a monopoly not be allocatively efficient?

20. 3.14 Operational Strategies: location
Natural monopolies
Natural monopoly occurs where ___________ of scale are so large that the dominant producer will have lower ________ of production so potential competitor can’t compete e.g. water supply or railway track.
Utilities have a natural monopoly over pipes – uneconomical/wasteful to have _________ distributers
May have monopoly power as there are no real _______________ for their product e.g. water firms
A local monopoly describes the only supplier in an area; for example, the only
costs, economies, multiple, substitutes

21. Socially optimum pricing: not on syllabus
Socially optimum pricing is also called marginal cost pricing.
It occurs when price = MC, in other words ___ = MC
What formula is this?
The formula for