1. Public Goods Common Resources Externalities – Positive or Negative Monopolies and Oligopolies Information Asymmetry When markets fail, governments may be able to correct the problem

2. 1.How do you face competition in your daily life? 2.How does competition apply to economics in a positive and a negative way? 1.How do you face competition in your daily life? 2.How does competition apply to economics in a positive and a negative way?

3. Many buyers and sellers in the market Goods offered by various sellers are the same Firms easily enter and exit the market Buyers and sellers are well informed

4. Single seller in a market High barriers to entry prevent competition

5. Single firm controls key resource Government grants exclusive operating rights Patent and Copyright System Natural Monopolies – Economies of Scale

6. Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly

7. Handful of large firms dominate a market Products are similar but with slight differences High barriers to entry keep new firms out Temptation to collude but also to cheat

8. Many buyers and sellers in the market Relatively low barriers of entry Products are not all the same (differentiation) Mini-monopolies…some control over price

10. Monopoly Pure Monopoly - only one firm in the industry Working Monopoly- 25% + market share What determines monopoly power? – the availability of close substitutes from rival industries – ability to maintain barriers to entry

11. Key Features of Monopoly There is one firm, which is also the industry It produces a unique good/ service There are complete barriers to entry and exit from the industry. Customers have only 1 firm to buy from, as there are no direct substitutes- Limited Choice The Firm is a ‘Price Maker’ The Firm has the ability to earn abnormal profits in the long run Low levels of economic efficiency- productive and allocative efficiency not being achieved

12. The revenue-output relationship under imperfect competition Under imperfect competition, firm can only sell more by reducing price of all units i.e. MR < AR. The firm is a price maker 41010010 812108129 -414112148 MRAR =TR/ Q TR = P X Q PQ

13. QO P Average and marginal revenue curves under monopoly

14. QO P AR=P MR

15. QO P The monopolist’s short run equilibrium output ARMR MC

16. QO P Equilibrium under Monopoly QEQE PEPE ARMR MC

17. Q O P Equilibrium under Monopoly

18. Q O P Short- run and long run abnormal profits QEQE PEPE AR = DMR MC AC Supernormal profit = (AR-AC)XQ = = TR-TC

19. The monopolist can maintain abnormal profits in the long run if : 1.There are barriers to entry. These may be - artificial (e.g. patent, brand loyalty) or - natural (e.g. economies of scale) 2.The market is not easily contestable Long run equilibrium

20. Monopoly Possible barriers to entry  A clearly differentiated product with brand loyalty  Economies of scale  Legal/ regulatory barriers eg Patents, statutory monopoly- granted legal protection from competition eg Post Office in UK  High sunk costs  Ownership/control of key factors of production  Other barriers- aggressive trading tactics- eg. Limit pricing (predatory pricing), the threat of aggressive merger and takeover, ownership/control of retail outlets and intimidation.

21. Contestable Markets : a market is perfectly contestable 1. the cost of entry and exit by potential rivals are zero 2. entry can be made very rapidly A market is less contestable if there are: Economies of Scale if market demand is =/> MES, then the firm is likely to be a natural monopoly Sunk Costs: a firm’s investment e.g. specific capital, cannot be employed in alternative uses

22. Allocative efficiency P = MC i.e the price a consumer is prepared to pay = cost to society of producing an additional unit, assuming no external costs Under PC, P = MC Under monopoly, P > MC

23. Productive Efficiency Firms are productively efficient if they are producing at the lowest point on their lowest possible AC (ATC) curve. Under PC firm is operating at min ATC Under monopoly, firm operating at > min ATC

24. Does the consumer always lose from monopoly? If a monopolist faces identical costs to a perfectly competitive industry, and can prevent entry, a monopoly will result in Higher prices Lower output

25. Natural Monopoly There are some industries where EoS are so large that competition would be neither profitable nor efficient Natural monopolies have continuously falling AC curves Egs. Electricity and gas infrastructures

26. Q P Natural Monopoly QEQE PEPE AR = D MR MC AC

27. ‘Advantages’ of monopoly Supernormal profits provide an incentive and a source of funds for process and product innovation: new technologies that may reduce costs i.e. LRAC under monopoly < LRAC under perfect competition. new products increase consumer choice E of S can lead to greater output and lower prices than under PC