Monopoly
By Courtney Lillvis

A monopoly is when there is only one provider of a service or product, meaning there is no competition. There are three main characteristics of a monopoly:

1) Single Seller- there can only be one provider of the goods or services.
2) No Close Substitutes- there can be no other products or services that can be used in place of the monopoly’s products or services. The product is unique.
3) High Barriers of Entry- when there is a monopoly it is very hard for other companies to enter the market. Sometime the market is so small that it is hard for even one company to survive.

Some natural ways monopolies get their power are from
Economies of Scale- when the long-run average cost declines as output increases.
Economies of Scope- this occurs when the total cost of producing two products in the same firm is lower than when they are produced separately.
Cost Complementarities- this exists when marginal cost of producing one output is reduced when the output of a different product is increased.


A monopoly does not have pressure from competitors when setting a price, so it can choose a price. If the price is too high, it may sell less but if the price is low it will sell more. A monopoly will tend to set the price at which it obtains the largest profit.



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In a competitive market, market demand will equal market supply in the long run. In this diagram the equilibrium point is when Q1=P comp, this is where price=MC. For a monopoly profits maximize at MC=MR. In this diagram this point is where P mon=Q2.
To maximize output a monopoly would use the equation MR(Q) = MC(Q)
Prices for monopolies exceed marginal revenue because for a monopoly to increase sales it must lower its price. Every time price is cut, the revenue will increase by the amount equal to the price of the unit last sold minus the sum of all price cuts on all prior units of output.Also as long as demand is elastic the total revenues will continue to increase. If demand becomes inelastic this will no longer be the case.

Some monopolies are natural and some monopolies are government supported.
An example of a natural monopoly would be where my Aunt lives. She lives in such small town there is only one grocery store, an IGA. The town doesn’t have a large enough population to support any more grocery stores than this, so the IGA has a monopoly.
Examples of government supported monopolies would be cable providers, public utilities, and the post office. In the case of utility companies, it would be expensive for another company to run their own power lines or pipes for water. It would also get messy having a bunch of wires and pipes running everywhere so the government keeps this from happening.
One of the most famous monopolies was AT&T. In 1960 90% of Americans used AT&T/Bell as their telephone providers, and then in 1974 the monopoly suit against AT&T started. The case was settled in 1982 when AT&T agreed to break away from Bell. AT&T did the logic exchanges and was a natural monopoly, where as Bell handled the long distance, manufacturing, and development. The Bell part of the company was not a natural monopoly and the government felt it should have competition. After the break up the Bell division was separated into regional companies like Southern Bell, Bell South, and other Bells.

Monopolies have a negative reputation and most people think it is because a monopoly can charge whatever it wants to, causing the customer to pay more and increasing profits. The “purely” economic case against monopolies is not about the transfer of wealth, but that it reduces the welfare of the overall economy. Customers buy less when a monopoly raises its prices above the competitive level, which causes less of the product to be produced. When this happens society as a whole losses income because the people producing the product bring home less income, jobs can be cut, and there is less money all around to be put back into the economy. The loss of consumer and producer surpdeluse is referred to as a deadweight loss.

Multiple Choice Questions:

1) Which one of these is not a characteristic of a monopoly?
a. Single Seller
b. High Barriers to Entry
c. Many substitutes
d. No close substitutes

The answer is c.
a. Single Seller- to be a monopoly there can be only one seller of the product or service. Mono=1
b. High Barriers to Entry- High barriers are what keep competition out of the market.
c. This is the wrong answer because there can not be substitutes.
d. No close substitutes- because there are no substitutes there is only one provider of the goods.

2) A product produced by a monopoly:
a. Has many substitutes.
b. Is unique.
c. Same as other products in the market.

The answer is b.
a. A key characteristic of a monopoly is that there are no substitutes for the product.
b. This is the correct answer because a product produced by a monopoly is unique. They are the only ones who produce it.
c. To be a monopoly there can’t be any other producer in the market.

3) An example of a natural monopoly is:
a. A cable provider
b. The post office
c. Utilities
d. The only gas station in a small town

The answer is d.
a. A cable provider is a government supported monopoly.
b. The pot office is a government supported monopoly.
c. Utilities are a government supported monopoly.
d. This is correct because the population of the town can only support one gas station, it is not done by the government.

4) For a monopoly to maximize profits:
a. MC=MR
b. P=MC
c. MC>MR
d. P=MR

The correct answer is a.
a. This is correct because a monopoly maximizes its profits at MC = MR
b. P=MC is where a competitive market would produce.
c. MC can not be greater than MR because that wouldn’t maximize profits.
d. Price does not equal MR. Price=MC for competitive markets and MR=MC for monopolies.

5) The economic case against monopolies is:
a. Monopolies they charge too much.
b. Monopolies transfer wealth to the wrong people.
c. Monopolies cause prices to increase, buyers buy less, then society as a whole suffer.

The correct answer is c.
a. Monopolies sometimes charge more, but they can only charge more if demand is elastic. If demand is inelastic then they can not.
b. The transfer of wealth to the wrong people is a moral question, not economic.
c. This is correct. When monopolies charge too much, people buy less, which cause less to e produced, which leads to less income for society to put back into the economy.





http://en.wikipedia.org/wiki/Monopoly

http://alpha.fdu.edu/~koppl/note19.htm

http://www.econlib.org/LIBRARY/Enc/Monopoly.html

http://www.tutor2u.net/economics/revision-notes/a2-micro-monopoly-economic-efficiency.html

http://www.corp.att.com/history/history3.html