monopoly

A firm is classified as a Monopoly when it satisfies the following conditions

1. A single firm serves the "relevant market" 2. The demand for the firm's product is the market demand curve 3. Firm has control over the price

This type of market situation arises when there is a barrier to entry into the industry that allows the single company to operate with little or no competition (vast economies of scale, barriers to entry or governmental regulation may be present). In a monopolistic market the producer will tend to produce less volume than “the amount that maximizes social welfare” //([|www.investorwords.com])// because they have the ability to control market output and price.

There are real world circumstances that result in situations called **sources of monopoly**. They are listed below: i) N**atural resources** such as land, precious metals, oil deposits, fields, etc. the supply of each is limited by a specific and measurable amount. When these types of resources are essential and not available anywhere else the owners of the resources automatically acquire natural monopoly powers. ii) In some situations **large amount of capital** is required to be invested right from the beginning. Steel production, railway construction etc. are examples of such enterprises. Those who possess such capital resources enjoy monopoly powers. Other small investors cannot compete with them and a monopoly exists due to barriers to entry. iii) In certain enterprises, **specialized technical resources** are required to be employed. Ship building, aeronautics, space research are real world examples. Those who possess such technical resources will have monopoly power. iv) In modern times **certain legal provisions** create monopoly rights. These are in the form of copyright norms, patent norms, standardization, etc. leading to monopoly power. v) Finally there are monopolies in the form of **public utilities**. Road construction, postal services, water supply, telecommunications, etc. are some of the examples. In the case of such services it is necessary to maintain a high quality and a uniformity of products or services. These types of utilities result in monopoly power. (//www.pinkmonkey.com//).

//Examples// for the Monopoly are Local cable company, Power supply company, If there is only one pharmacy/grocery store only in the village and other pharmacies/grocery stores are far from that one then that one grocery store in the village is a monopoly.

Real world examples of the Monopoly are Royal Mail, Microsoft, Tesco, British Telecom, Boeing and Airbus etc.

__Graphical representation :__
 * //Difference between Competitive market and a Monopoly ://**



TEST QUESTIONS: True/False: 1. If a certain firm is the only one that can produce a certain good or service, it has monopoly in the market for the good or service they are providing. TRUE
 * //Profit Maximization of Monopoly firm ://**

2. In a monopolistic market situation price has no effect on demand. TRUE

3. A few common barriers to entry in a monopolistic market are: A. Legal Barriers to Entry B. Patents that protect the good provided C. Natural Barriers to Entry
 * D. All of the above**

4. A barrier to entry that significantly contributes to the establishment of a monopoly would be A. **Economies of Scale** B. Price-taking Behavior C. Technological Progress D. Y-inefficiency

5. Monopolists' profits may be positive, negative, or zero A. **In the short run**. B. In the long run. C. In both the short and long run. D. Where marginal cost equals marginal revenue and where average total cost is less than demand

6. The long run, monopolistically competitive firms produce a level of output such that: A. P = AC B. P = MR D. P < AC
 * C. P > MC**

//References :// Economics Text book - Baye & Internet websites

Test Answers: 1. TRUE - A pure monopoly is present when a firm has complete control over the good or service being provided to the market and there are no other goods or substitutes available.

2. TRUE - Due to the nature of a monopoly, there are no substitutes available so the provider can increase the price without fear of consumers switching to a like good/substitute. 3. All of the Above - Barriers to entry in a monopolistic market include: Legal barriers to entry, natural barriers to entry, patents that protect the good provided Examples include the extremely high cost of developing new drugs, limited sources for a low cost input, a unique platform for software or other products, patent protection of a low cost production technique, the difficulty of trying to compete with famous brands and air transport agreements that make it difficult for new airlines to obtain landing slots at popular airports.

4. Economies of Scale - In some cases, a greater efficiency is the result of //economies of scale// which means that the production cost per unit of product declines as the volume of output increases due to the ability to use some resource more intensively (e.g., a steel mill or railroad with lots of excess capacity). A natural monopoly exists for a product for which there are sufficient economies of scale such that the product can be produced or supplied by a single company at lower cost than by multiple, competing companies which results in a barrier to entry for other firms.

5. In the short run: profits can differ between positive, negative or zero depending on the stragety the firm takes in the short run.

6. P>MC: The fact that price exceeds marginal cost implies that monopolistically competitive firms priduce less output thatn is socially desirable.