A Level & NCEA Economics – Monopoly mindmap

With the A Level essay paper on Tuesday next week and the NCEA Level 3 exam on 18th November here is a revision note on monopoly.

The word monopoly or monopolist probably brings to mind a business that takes undue advantage of the  consumer, sells faulty products, gets rich and any other bad thoughts that one can have about big business. If we are to succeed in analysing and predicting the behaviour of  non-competitive firms, however, we will have to be somewhat more objective in defining a monopolist. Our definition of monopoly is one that will be as applicable to small businesses as it is to companies selling on a nation-wide basis. Thus, a monopolist is defined as a single supplier that constitutes the entire industry.

A seller prefers to have a monopoly rather than to face competition. In general, we think of monopoly prices as being higher than competitive prices, and of monopoly profits as being higher than competitive profits. How does a  firm obtain a monopoly in an industry? Basically, there must be barriers to entry that enable firms to receive  monopoly profits in the long run. We define barriers to entry as those difficulties facing potential new competitors in an industry. What sort of difficulties might a new competitor face?

• Ownership of Resources: Consider the possibility of one firm owning the entire  supply of a raw material input that is essential to the production of a particular commodity. The exclusive ownership of such a vital resource serves as a barrier to entry until an alternative technology not requiring the raw material in question is developed.

• Government Restrictions – Licenses: In many industries it is illegal to enter without a license provided by the Government. For example in NZ you could not operate an unlicensed Casino or radio service.

• Patents: A patent is issued to an inventor to protect him/her from having the invention copied for a period of years. At the end of the patent period the patented invention is no longer private property but public property which anyone can copy or reproduce.

• Problem in Raising Adequate Capital: Certain industries require a large capital investment. The firms already in the industry can, according to some economists, obtain monopoly profits in the long run because no competitors can raise the large amount of capital needed to enter the industry.

• Economies of Scale: Sometimes it is not profitable for more than one firm to exist in an industry. Such a situation may arise because of a phenomenon we have already discussed known as economies of scale. When economies of scale exist, costs increase less than proportionately to the increase in output. The first firm that is established is able to   enjoy very low average costs per unit. If it charges a  price that reflects a favourable cost situation then no rival firm can threaten its position.

Source: Adapted from A Level Economics Revision Guide by Susan Grant

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