EC4101 Week 11 Lecture 01 PDF

EC4101 Wk.11 Lec.01 Dominant Firm: One which has over 50% of a market share. Monopolist: The only seller/potential seller of a good with no close substitute in the industry. They have a market share of 100%. They have market power, the ability to raise prices. There are barriers to entry,...

EC4101 Wk.11 Lec.01 Dominant Firm: One which has over 50% of a market share. Monopolist: The only seller/potential seller of a good with no close substitute in the industry. They have a market share of 100%. They have market power, the ability to raise prices. There are barriers to entry, which can be caused by: o Control of Natural Resources/Inputs o Increasing Returns to Scale due to fixed costs being very high lead to a natural monopoly (most utility networks) o Technological Superiority o Network Externality: The value of a good/service to an individual increasing as more use the same good/service. o Legal Barriers (Patents/Copyrights/Licences) o Acquisitions, Mergers, Takeovers make the industry more concentrated. The demand curve faced by a firm in a monopoly is downward sloping. Profit is always maximised at the quantity where MR=MC, regardless of the market structure. In a monopoly, MR is below D. It is further below D if it is more inelastic. There is always a quantity and price effect when prices change. Profit maximisation occurs where MR=MC, but this is not what a monopolist will choose. A monopolist goes directly above the profit maximisation point until it reaches the demand curve to find the selling price. A monopolist will make supernormal profits as there is no fear of market entry. They are price-setters. A monopolist never produces on the inelastic part of the demand curve. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: Economics (12th Ed.) David Begg.