INSTITUTE OF BUSINESS AND TECHNOLOGY

REPORT ON MONOPOLY

Name Malik Qamar Hayat

Roll # BEM-1050

Course Managerial Economics

Teacher: Mr. Rana Ilyas

CITY CAMUS- SHAHRAH-E-FAISAL

FALL 2009

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 Letter of Transmittal

Managerial Economics
BIZTEK
City Campus

November 8, 2009

Mr Rana Ilyas
Course Teacher Managerial Economics
BIZTEK
City Campus

Sir,

I have prepared a report for “Managerial Economics” as course requirement. I found

it a very interesting subject to work on. I have tried our level best to understand
how to formulate and document a professional report based on our learning from
the course.

I choose and research on the topic from our Economics Course Outline
“Monopoly”. I tried to find all the related terms of Monopoly, its Kinds, properties
and theory.

I am very much pleased to inform you that due to your cooperation I am able to
complete and submit this report on time. I request you to please go through this
report and feel free to give us a feedback. I will be honored to answer all your
queries.

Regards,

_____________

Malik Qamar Hayat

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 Acknowledgement

First of all I would like to thank Almighty God for giving us the strength,
courage to accomplish all tasks big and small, the will power and patience in
making this report possible.

I would like to thank our Teacher Mr. Rana Ilyas, who gave us all the guidance and advice in
making this report possible. We are grateful for his help and co-operation.

I would also like to thank all the people for the information they provided us for our
project, we could never have been completed it without their co-operation.

In the end I hope and pray that this report meets the criteria, which I was asked to adhere to.

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 CONTENTS

Page No.
COVER PAGE 1
LETTER OF TRANSMITTAL 2
ACKNOWLEDGEMENT 3
CHAPTER NO. 1 INTRODUCTION 5
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1.1 Monopoly
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CHAPTER NO. 2 KINDS OF MONOPOLY
2.1 Natural Monopoly
2.2 Trusts
2.3 Cartels
2.4 Mergers
CHAPTER NO. 3 CHARACTERSTICS OF MONOPOLY 7
CHAPTER NO. 4 MONOPOLY THEORY 8
CHAPTER NO. 5 DIFFERENCE MONOPOLY AND OTHER MARKET 9
CHAPTER NO. 6 CONCLUSION 10

1.1 The Need for an Eco-Label

1.2 What is an Eco-Iabel?

1.3 Types of Eco-Labeling
1.4 Eco-Labeling Schemes
1.5 What are the benefits of Eco-Labelling?
1.6 Eco-Labelling and International Scenario

2. Eco-labeling and International Trade

2.1 Trade and Eco-labels

2.2 Non-Tariff Technical Barriers to Trade

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Introduction

Economists assume that there are a number of different buyers and sellers in the marketplace.
This means that we have competition in the market, which allows price to change in response to
changes in supply and demand. Furthermore, for almost every product there are substitutes, so if
one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market
with many buyers and sellers, both the consumer and the supplier have equal ability to influence
price.

In some industries, there are no substitutes and here is no competition. In a market that has only
one or few suppliers of a good or service, the producer(s) can control price, meaning that a
consumer does not have choice, cannot maximize his or her total utility and has have very little
influence over the price of goods.

Monopoly,

In economics, situation in which only a single seller or producer supplies a commodity or a

service. For a monopoly to be effective there must be no practical substitutes for the product or
service sold, and no serious threat of the entry of a competitor into the market. This enables the
seller to control the price.

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A monopoly is a market structure in which there is only one producer/seller for a product. In
other words, the single business is the industry. Entry into such a market is restricted due to high
costs or other impediments, which may be economic, social or political. For instance, a
government can create a monopoly over an industry that it wants to control, such as electricity.
Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one
entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the
government has sole control over the oil industry. A monopoly may also form when a company
has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a
patent on Viagra.

A monopoly must be distinguished from monopsony, in which there is only one buyer of a
product or service; a monopoly may also have monopsony control of a sector of a market.
Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which
several providers act together to coordinate services, prices or sale of goods. Monopolies can
form naturally or through vertical or horizontal mergers

Kinds of Monopolies

Among the various kinds of economic monopolies are natural monopolies, trust companies,
cartels, and industrial mergers.

A Natural Monopoly

Pure monopolies—only a single firm in an industry—is rare in most economies, except among
the public utilities. These industries produce goods and provide services vital to the public well-
being, including such essentials as water, power, transport, and communications. Although such
monopolies often seem to be the most effective way to supply vital public services, they must be
regulated when privately owned or else be owned and operated by a public body.

B Trusts

This is a device by which the real control of a company is transferred to an individual or small
group by an exchange of shares of stock for trust certificates, which are issued by the individuals
seeking control. A similar device is the holding company, which issues its own stock shares for
sale to the public and “holds” or controls other companies by owning their shares. Such an
arrangement is not necessarily illegal, unless created specifically to monopolize commerce in
trade.

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C Cartels

Perhaps the best known form of combination is the cartel, due to the high profile of OPEC. A
cartel is an organization formed by producers whose purpose is to allocate market shares, control
production, and regulate prices. OPEC has done all these things in the petroleum industry, but its
most highly publicized acts have been to set petroleum’s world price.

D Mergers

Efforts to organize an industry in order to achieve practical monopoly control take different
forms. Any combination of firms that reduces competition may be of a vertical, horizontal, or
conglomerate character. A vertical combination involves merging firms at different stages of the
production process into a single unit. Some of the petroleum companies, for example, own oil
fields, refineries, transport systems, and retail outlets. All mergers and combinations have the
potential for eliminating competition and creating monopoly.

Characteristics of monopolies:

There is only one firm which supply the entire market and many buyers & consumers

Entry into the market is restricted, e.g. due to high costs and some special barriers to entry. A
social, political or economic impediment that prevent firms from entering a market.

The firm sells a unique product, which has no close substitutes.

The firm has market power (that is it can control its price)

Faces market demand curve

Profit-maximiser

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THE MONOPOLISTS DEMAND CURVE- CONSTRAINTS ON MONOPOLY

It is true that a firm with monopoly has price-setting power and will look to earn high levels of
profit. However the firm is constrained by the position of its demand curve. Ultimately a
monopoly cannot charge a price that the consumers in the market will not bear.
A pure monopolist is the sole supplier in an industry and, as a result, the monopolist can take the
market demand curve as its own demand curve. A monopolist therefore faces a downward
sloping AR curve with a MR curve with twice the gradient of AR. The firm is a price maker and
has some power over the setting of price or output. It cannot, however, charge a price that the
consumers in the market will not bear. In this sense, the position and the elasticity of the demand
curve acts as a constraint on the pricing behavior of the monopolist. Assuming that the firm aims
to maximize profits (where MR=MC) we establish a short run equilibrium as shown in the
diagram below.
The profit-maximizing output can be sold at price P1 above the average cost AC at output Q1.
The firm is making abnormal "monopoly" profits (or economic profits) shown by the yellow
shaded area. The area beneath ATC1 shows the total cost of producing output Qm. Total costs
equals average total cost multiplied by the output.

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Difference b/w Monopoly and Competitive Industry

Economists have developed a complicated body of theory to explain why the behavior of a
monopoly firm differs significantly from that of a competitive firm.

A monopoly company, like any other business, confronts two forces:

(1) a set of demand conditions for the commodity or service it produces;

(2) a set of cost conditions that governs how much it has to pay to those who supply the
resources and labour required to produce its product.

Every business firm must adjust its production to the point at which it is able to maximize its
profit—that is, the difference between the revenue it receives from its sales and the costs it incurs
in producing the amount sold. The level of production at which it achieves its maximum profit is
not necessarily the one at which the firm is getting the highest possible price for its product. The
major difference between a monopoly firm and one in a competitive industry is that the
monopoly will have greater control over the price it charges for its product, although this control

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is never absolute. The monopoly firm thus has more freedom than the competitive firm to adjust
price as well as production as it strives to achieve a maximum profit.

The diagram below shows how price and output differ between a competitive and a monopolistic
industry. We have assumed that the cost structure for both the competitive firm and the
monopoly is the same - indeed we have assumed that output can be supplied at a constant
marginal and average cost.

Assuming that the monopolist seeks to maximize profits and that they take the whole of the
market demand curve, then the price under monopoly will be higher and the output lower than
the competitive market equilibrium. This leads to a deadweight loss of consumer surplus and
therefore a loss of static economic efficiency.

Conclusion

A monopoly is a market structure in which there is only one producer/seller for a product. In
other words, the single business is the industry. Entry into such a market is restricted due to high
costs or other impediments, which may be economic, social or political.

The firm sells a unique product, which has no close substitutes.

The firm is a price maker and has some power over the setting of price or output. It cannot,
however, charge a price that the consumers in the market will not bear.

The monopolist can take the market demand curve as its own demand curve. A monopolist
therefore faces a downward sloping AR curve with a MR curve with twice the gradient of AR

It is true that a firm with monopoly has price-setting power and will look to earn high levels of
profit.

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The major difference between a monopoly firm and one in a competitive industry is that the
monopoly will have greater control over the price it charges for its product, although this control
is never absolute.

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