Cambridge International as and a level Economics Ebook

Figure 7.21 
A comparison of a perfectly competitive 
industry with a profit maximising monopolist
171
Chapter 7: The price system and the microeconomy 

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Th
e criticisms of real-world monopolies based on a 
comparison with perfect competition may not be valid for 
two reasons. First, perfect competition is a theoretical ideal. 
To have more applicability, monopoly must be compared 
with the more relevant models of monopolistic competition 
and oligopoly. Th
ese are also characterised by productive 
and allocative ineffi
ciency. Th
ey may also involve a waste of 
resources in competitive advertising. Secondly, 
Figure 7.21
is drawn on the assumption that the costs in monopoly 
will be the same as in perfect competition. Th
is ignores 
the possibility that the monopolist can achieve internal 
economies of scale that would reduce unit costs. It is 
possible that a monopolist could charge a lower price than 
would occur in perfect competition, making consumers 
better off , even though the monopolist is making 
abnormal profi ts.
Th
ere are, however, positives that can be said of 
monopolies in the following circumstances:
■
A monopolist cannot always make abnormal profit – it 
depends how high its costs are. There may be situations 
where the fixed costs are so high relative to the total 
cost that the market price only just covers the average 
costs. In this case the monopolist would only make 
normal profit.
■ 
The concept of abnormal profit must be considered 
carefully. One of the criticisms of a competitive market is 
the uncertainty of profits in the long run. A monopolist 
however can plan future investment and finance it through 
what are guaranteed profits. This may off er customers 
better products and the workforce greater security.
■ 
The investment may take the form of process innovation, 
implementing new techniques of production with the 
objective of lowering unit costs.
■ 
Alternatively, the profit could be used to finance product 
innovation, which will add to consumer welfare in the 
future, either through an improvement in the product’s 
performance or through widening consumer choice.
■
If the benefits of economies of scale and greater 
investment are passed on to consumers, it could be 
argued that they have gained from the existence of 
abnormal profit.
One of the criticisms raised against state-owned 
monopolies is that the absence of competition makes them 
less effi
cient. Th
e essence of the argument is that fi rms with 
a guaranteed market can be complacent. Monopolists are 
said to suff er from