A theory suggests that a monopoly in its purest form has total control of a market. A firm itself becomes an industry in this case, this means that we can assume that average revenue curve is actually the market's demand curve.
a pure monopoly, yaaaay :D
The equillibrium of a monopoly is at the point where MC=MR. In this case the firm will be a price maker, which will enable it to make abnormal profits and, well, be the only one. As it is assumed, one of the main firms' target is profit maximisation. On the picture above, we can see that at the price P1 a pure monopoly generates the amount of revenue which exceeds the amount of costs, hence, making a supernormal profit (shaded in grey). In a competitive market everything would be different, but if we assume that a competitive market has the same costs as a monopolistic market, then the equillibrium would be at the point where AR=MC. it is obvious, that in this case a firm would have to supply more but at a lower price, which means much less profit than in a monopolistic market.
Of course, no firm likes competitors, so one of the main features of a monopolistic market are high barriers to entry, which prevent new firms from entering the market. There are several types of barriers to entry, such as:
Structural barriers (innocent entry barriers) – arising from differences in production costs
Strategic barriers (see the notes below on strategic entry deterrence)
Statutory barriers - entry barriers given force of law (e.g. patent protection of franchises such as the National Lottery or television and radio broadcasting licences)

However, we should remember that a pure monopoly does not exist in the real life, although some firms are using the same principles, because they, not completely, but dominate the market.
The UK recognises any firm that has more than 25% of market share is able to act like a monopoly, according to the Competition Act of 1998. A firm with more than 40% of market share is seen as dominant in the market.
The power of monopoly gives a firm an opportunity to make supernormal profits by setting a high price and having a resticred output at the same time. Although the Competition Act seeks to prevent such firms from setting unreasonable high prices by intervening in markets.


chris sivewright said...

If you produce where MC = AC, the average costs are lower.

Also as the demand curve is elastic then surely the total revenue is higher.

So why not produce where MC = AC?

Also, in your monopoly diagram, where is the supply curve?

Mary said...

marginal cost is the supply curve

chris sivewright said...

And the first question?

If the monopoly gains economies of scale this is shown by a shift of the MC and also the AC curve. Does this therefore mean that ec of scale causes a shift in supply? If so then in the normal D/S situation, if the supply curve is not shifting is there no ec of scale?

If the AR and MR shift outwards we therefore have a before and after output level. This gives two supplies. Surely joining those two points together would give a supply curve?

he he

Mary said...

ok i'll ask Ian

chris sivewright said...

you should be able to work it out, G&T

Mary said...

nah.. not now
Mr Mary contacted me lol

chris sivewright said...

he he he