Cambridge International as and a level Economics Ebook

Monopoly
A monopoly is where a single fi rm controls the entire 
output of the industry. Th
is is called a pure monopoly 
and is at the opposite end of the spectrum to perfect 
competition. In practice, this strict defi nition is relaxed 
in so far as a monopoly can occur when a fi rm has a 
dominant position in terms of its market share. In the UK, 
for example, a legal monopoly is when a fi rm has more 
than 25% of the total market; if this share exceeds 40% 
then the monopoly is said to be ‘dominant’.
In theory, a monopoly has the following characteristics:
■ 
a single seller
■ 
no close substitutes
■ 
high barriers to entry
■ 
the monopolist is a price maker.
A monopoly is protected from competition by the 
barriers to entry explained earlier. Th
e word ‘monopoly’ 
conjures up an image of giant powerful fi rms. However, 
a local monopoly can exist where a relatively small fi rm 
dominates a local market either because it is too costly for 
others to enter or the prospect of profi t is not high enough. 
Even when monopolists are large, the extent of power 
must not be exaggerated. Sometimes a domestic monopoly 
can be suddenly broken by new competition, say, from an 
overseas importer of similar goods and services.
A single fi rm or pure monopolist in theory would 
face a downward-sloping market demand curve. In 
this situation it can decide on the price to charge or the 
quantity to supply, but not both. Th
ere may be situations 
where the monopolist is unable to make abnormal profi ts 
despite having market power. One such example would 
be where the fi xed costs are so high that the necessary 
price would be outside the range that the consumers could 
aff ord. Th
is could occur, for example, in the case of a new 
groundbreaking pharmaceutical product. It may be that all 
the monopolist can hope for is that the revenue covers the 
production costs.
Figure 7.19
 shows the equilibrium output of a pure 
monopolist. A profi t-maximising monopolist would 
choose the output where MC 
=
MR. Th
is output will be 
somewhere over the price range where demand is price 
elastic and will be sold at the price consumers will pay. If 
the total revenue is higher than the production costs, it will 
make abnormal profi t. Th
is will be a permanent feature. 
In monopoly, there is no distinction between the short run 
and the long run because of the barriers that prevent the 
entry of competitors. Th
ere is no economic incentive for 
the monopolist to move away from the profi t-maximising 
output 
Q
.
Th
e monopolist’s profi ts could be increased in 
certain circumstances by a practice known as price 
discrimination. Th
is occurs where the monopolist chooses 
to split up the output and sell it at diff erent prices to 
diff erent customers. Th
is practice will be analysed in more 
detail towards the end of this chapter.
TOP TIP
The pure monopoly model assumes that the firm 
controls the whole market; in practice, a monopoly may 
have as little as 25% market share.