Monopoly Characteristics and Barriers to Entry

Monopoly Characteristics

• A monopoly consists of a single seller and a large number of buyers.
• The product offered is unique with no close substitutes.
• Monopolies are price makers.
• Entry to the market is blocked.
• Minimum advertising is needed.

Barriers to Entry

• Barriers prevent firms or sellers from entering the industry.
• A weaker barrier may allow a few firms to enter, creating an oligopoly.

Types of Barriers to Entry

• Economies of scale occur when average cost decreases as production expands.
• In a monopoly, new firms find it impossible to enter due to economies of scale.
• Monopolies are protected from competition.
• New firms need a large scale operation to enter, which is difficult.
• Small scale producers can hardly achieve normal profits and will eventually fail.
• A monopolist controls ownership of raw materials, preventing rivals.
• A sugar producer in Malaysia controls resources, making new entry nearly impossible.
• The government restricts new firms by imposing legal licenses.
• Licenses on television stations prevent new firms from entering and encourage monopolies.
• Patents give an inventor the exclusive right to use their invention.
• Patent laws prevent competitors and provide a monopoly power for the life of the patent.
• Copyright prevents potential rivals from copying products.
• Copyright gives exclusive rights to the books' author, music composer, film producer, etc.

Monopoly Demand Curve

• The main difference between a competitive firm and a monopolist is on the demand side.
• The demand curve for a monopoly is downward sloping by the law of demand.
• Monopolies set prices based on the elasticity of demand and its relation to total revenue.
• The marginal revenue curve lies below the demand curve.
• When marginal revenue is positive (MR<0), demand is inelastic.
• When demand is inelastic, as price increases, total revenue will increase.
• Total revenue is unchanged by price changes when demand is unitary elastic, where marginal revenue is zero (MR=0).

Monopoly Short Run Equilibrium (Profit Maximisation)

• Short run profit maximisation for a firm occurs in the monopoly market.
• The vertical distance between total revenue and total cost reflects total profit.
• The difference between total revenue and total cost is highest with 3 units.
• This provides a maximum profit of USD 160.
• Also, the area shows that the firm has experienced equilibrium in the short run.
• The average revenue and demand curve of a monopoly is downward sloping.
• The marginal revenue curve lies below the average revenue curve.
• The firm achieves equilibrium and maximum profit with marginal revenue equals marginal cost.
• This appears at the intersection point between marginal revenue and marginal cost at point E*.
• The profit-maximising price occurs at P*.

Short Run Profit Types in Monopoly

• Monopolies earn supernormal or economic profits where average revenue is greater than average cost.
• Equilibrium happens when marginal revenue equals marginal cost at E*.
• The profit maximising quantity is at Q where the monopolist charges the price at A.
• The shaded area ACDB represents supernormal profit.
• Monopolists have subnormal or negative profits, or losses, when average revenue is less than average cost at point E*.
• Profit maximising output is obtained at Q and where the profit-maximising price is at B.
• Subnormal profit the monopolist makes appears in the shaded area ADCB.
• At the equilibrium point where marginal revenue equals marginal cost, a monopolist can break even.
• The profit-maximising output and price are at Q and A respectively when marginal revenue equals marginal cost.
• Average revenue equals average cost, and the monopolist earns normal profit.

Monopoly Long Run Equilibrium

• The long run follows the same rule as the short run where marginal revenue equals marginal cost.
• Monopolists earn supernormal profit because of barriers to entry.
• With no competition, monopolies can increase or decrease prices based on cost.
• A monopolist may increase its price to avoid minimum profit or losses if production costs increase.
• Long run equilibrium is achieved when long run marginal revenue equals long run marginal cost at point E*.
• Profit-maximising price is at point A, profit-maximising output at point Q.
• Barriers to entry mean that the monopolist earns supernormal profit in the long run, shown by area ACBD.