An Introduction To Monopoly Economics Essay

1.0 Introduction

Economics is the study of the allocation of scarce resources to meet unlimited human wants. Microeconomics is concerned with decision-making by individual economic agents such as firms and consumers. Furthermore, Microeconomics is a subject that help us to gain knowledge economizing choices among alternatives uses scarce resources.

2.0 Introduction to Monopoly

Definition of Monopoly

Monopoly is an industry that has only one firm that sells a good which has no close substitutes. Monopoly firms also represent industries because there are no other firms in the market. Products that are from monopoly market are electricity, water, cable television, local telephone services and many more. Examples of monopoly firm in Malaysia is Tenaga Nasional Berhad, TNB’s unique position as a monopoly in the generation, transmission and distribution of electricity in Peninsular Malaysia. TNB is the only firm that provides us electricity to every building in Malaysia. Another monopoly firm in Malaysia that only provide sewerage services is Indah Water Konsortium Sdn Bhd. Indah Water Konsortium is the only firm in Malaysia that mainly responsible for operating and maintaining the public sewage treatment plants and network of underground sewerage pipelines.

2.1 Characteristics of Monopoly Market

2.1.1 One seller and large number of buyers

Monopoly market characteristics are they is only one producer or seller in the market and there are many buyers. Therefore, the firm had the power to control the whole market whether it is from the angle of determining the price or the quantity of production. A monopolist has the power to determine the level of price because there is no competition from other firms. Therefore, if the monopolist intends to sell a bigger quantity, it has to reduce the price. This means that the monopolist can only control the price or the quantity of sales, and not both at once.

2.1.2 No close substitution

Furthermore, monopoly firm’s goods have no substitutes, its means consumers have no choice other than what is produced by the monopolist and they can’t find any substitute of the product. For example, Telekom Malaysia is a firms that provide home telephone services which has no close substitutes but if the buyer can find another firms that provide home telephone service therefore the product is no longer in monopoly.

2.1.3 Restriction of entry of new firms

All the competitors are prevented from entering the market due to strict barriers to the entry of new firm. To restrict the entry of new firms into the industry, there are barriers to entry that are natural or legal restrictions. There are no competition faces by monopolist is because of barriers of entry.

2.1.4 Advertising

A monopolist doesn’t need to advertise their product or services to increase sales because monopolist had the right to control the market and consumers know where to obtain the products and they have no choice to buy from other producer. Monopoly firms that provide local public utilities such as water, electricity and home phone services doesn’t need to advertise since they are the only firms that provide it and customers had no choice to buy it from another firm.

2.1.5 Diagram of Monopoly

Monopoly

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A monopoly market will therefore mean that the market supply curve is identical to the single firm’s supply curve and that the market supply curve is identical to the single firm’s supply curve and that the market demand curve is identical to the firm’s Average Revenue (AR) curve

Monopoly Equilibrium – Normal Profit .C:UsersUserDownloadsP1050665_副æÅ“¬.jpg

In the short term, a monopolist will enjoy normal profits when it is producing at output quantities where MC = MR and that its AC = AR. (AC includes the cost/ reward/ opportunity cost of entrepreneurship).

2.1.6 Conclusion

In a monopoly, there is only one firm, the sole producer of a good, which has no close substitutes. A monopoly exists when there is only one firm in the industry. The monopoly firm is a price maker, that means monopoly firm can choose what price to change. Nevertheless, it still constrained by its demand curve. A rise in price will lower the quantity demanded.

2.2 Introduction to Question 2

It is traditional to divide industries into categories according to the degree of competition that exists between the firms within the industry. Even in a free enterprise system, not all industries are equally competitive. Economist have identifies four degrees of competition in a private enterprise system. There are four such categories: perfect competition, monopolistic competition, oligopoly and monopoly

2.2.1 Definition of Perfect competition, Monopolistic competition, Oligopoly and Monopoly

First of all is perfect competition is the market where there is a large number of buyers and seller. The goods sold in the market are homogenous where most of the goods are alike and most likely the same. Therefore, sellers can easily enter and exit from the market. Most of the agricultural goods are included in perfect competition market such as vegetables, fruits, rice, coffee beans, wheat, primary commodities, gold, silver and others.

Second will be monopolistic is a market structure in which there are large numbers of small sellers selling differentiated products but these are close substitute products and have easy entry into and exit from the market. Most of the products in monopolistic competition are substitutes and the only differences of the products are such as branding. Unlike perfect competition, in monopolistic competition market, most of the products are different, but goods are close substitutes for one another. Products that are under monopolistic competition are shoes, clothes, books, watches, toothpastes, soaps, ice creams, chocolates and many more.

Next will be oligopoly, where it is a market structure in which there are only one firms selling either standardized or differentiated products and it restricts the entry into and exit from the market. Due to difficult or impossible for new firms to enter the market, most of the firms in oligopoly market can earn abnormal profits in long run. Examples for this market are cigarettes, automobiles, electrical equipment and cement

Lastly monopoly, where it is only exists when an industry or market has only one producer. Most of the public utility firms are in monopoly market.

2.2.2 Features of the four market structures

2.2.3 Number of firms

In perfect competition market, there are very many number of firms while monopolistic competition is just several or many. Number of firms in oligopoly market are few and monopoly market is just one.

2.2.4 Freedom of entry

In perfect and monopolistic competition market, new firms are unrestricted and competitor had freedom to enter the market. For oligopoly and monopoly market, new firms are restricted or completely block. The entry of new competitors in oligopoly market is hard because large capital investment is needed. Monopoly faces no competition because barriers of entry.

2.2.5 Nature of product

Product in perfect competition market are homogenous products while monopolistic competitive firm sells product that are differentiated product. Product differentiation may lead monopolistic competition in selling cost. Products sold under oligopoly can be either homogeneous or a differentiated product. Furthermore, products from monopoly firm are unique and has no close substitute.

2.2.6 Examples of product

Products that sold in perfect competition are usually cabbages, carrots, local farmer (these approximate to perfect competition) while products that are in monopolistic competition market are usually created with brand loyalty so that consumer will keep on buying the products. Furthermore, products that are in oligopoly are cement, cars, electrical appliances and products in monopoly are usually public utility.

2.2.7 Implication for demand curve for firm

Demand curve for perfect competition firm are horizontal. The firm is a price taker. While for monopolistic competition firm are downward sloping, but relatively elastic. The firm has some control over price. For oligopoly firm, the demand curve are downward sloping, relatively inelastic but depends on reactions of rivals to a price change and for monopoly firm the demand curve are downward sloping, more inelastic than oligopoly, The firm has considerable control over price.

2.2.8 Conclusion

Type of Market

Number of Firms

Freedom of entry

Nature of product

Examples

Implication for demand curve for firm

Perfect competition

Very many

Unrestricted

Homogeneous

(Undifferentiated)

Cabbages, carrots, local farmer (these approximate to perfect competition)

Horizontal. The firm is a price taker.

Monopolistic competition

Many/several

Unrestricted

Differentiated

Builders, restaurants

Downward sloping, but relatively elastic. The firm has some control over price

Oligopoly

Few

Restricted

1. Undifferentiated

2. Differentiated

1. Cement 2. Cars, electrical appliances

Downward sloping, relatively inelastic but depends on reactions of rivals to a price change

Monopoly

One

Restricted or completely blocked

Unique

Public utility

Downward sloping, more inelastic than oligopoly, The firm has considerable control over price

3.0 Conclusion and Recommendation

In this assignment, I had done research about monopoly market and its characteristics. In a monopoly, there is only one firm, the sole producer of a good, which has no close substitutes. A monopoly exists when there is only one firm in the industry. The monopoly firm is a price maker, that means monopoly firm can choose what price to change. Nevertheless, it still constrained by its demand curve. A rise in price will lower the quantity demanded. Furthermore, I had done research about the four market structures which are Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. The difference for each market structure can be determined by looking at characteristics such as the number of firms in the industry, the uniformity of the good produced, the ability of the firm to decide the price, the ease of exiting and entering by the firm and the degree of freedom to make decisions. By understanding each characteristic, we can identify a firm’s category and the market structure in which it operates, and understand the behavior of the firm.