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What a monopoly is Advantages of monopolies Disadvantages of monopolies Monopolies and resource allocation
What a monopoly is
Monopoly ± this is where there is a single producer in the market Features:
± ± ± ± ± One producer is able to charge relatively high prices New products are rarely introduced Resources are not used efficiently Monopolies have market power Monopolies are able to set prices
Features of Monopolies
Monopolies are price setters ±they are able to set the price for the whole market Some markets are considered to have ³natural monopolies´ in this case having one producer is seen as the ideal If a natural monopoly occurs then to ensure resource allocation is efficient they need to be monitored by a regulatory body or watchdog e.g. OFTEL and British Telecom
Advantages of Monopolies
As monopolies often operate on an immense scale they can exploit economies of scale Economies of scale occur when output increases and unit costs decrease These cost reductions will lead to a decrease in costs and increase in profits for the monopoly producer However some of the gains in productive efficiency may be transferred to the consumer in the forms of profits
Advantages of Monopolies
Government regulation of monopolies means annual price increases can be controlled Some of the monopolies profits may be used to invest in research and development This expenditure on innovation and invention could lead to efficiency gains in the market
Advantages of Monopoly
If a firm is operating as a domestic monopoly but is open to international competition their market power will be limited and they will therefore have to charge lower prices
Disadvantages of Monopolies
It is argued that monopolies producer at a lower output with higher prices than a producer in a competitive market would This leads to a reduction in the consumer surplus and an increase in producer surplus Supernormal profits are earned by the monopoly at the expensive of allocative efficiency
Disadvantages of Monopolies
The lack of any competition in the market can increase inefficiency as customers are stripped of the ability to choose Dynamic efficiency may be lost if monopolist limits consumer choice and innovates less
Summary
A monopoly is where there is one producer who dominates the market In a monopoly the monopolist sets prices as they have market power Monopolists can benefit from economies of scale which may be passed onto consumers in the form of lower prices Monopolists may conduct more research and development Monopolies produce less at higher prices reducing the consumer surplus Economists view monopolies as market failure Monopolies don¶t allocate resources in the most effective way