Chapter 7: Monopoly

Monopoly – refers to a market situation where there is only one seller or producer supplying unique
goods and services. From the Greek word “mono” mean one, “polistic” mean seller.

Monopolies are considered extinct or rare nowadays, some of them exist because of some
governmental regulation, but even then, monopolistic should always look over their shoulders for
potential entry of competitors in the industry.

Monopoly is a market structure characterized by:

1. Single Seller or Producer
2. Unique Product
3. Impossible Entry
Barriers to entry include:
a. Sole ownership of a vital resource
b. Legal barriers like government franchises and licenses
c. Economies of scale

Other Characteristics of Monopoly Market

- Dictates the price of his commodities
- No need for an extensive advertising

Hypothetical Demand and Cost Schedule for a Monopoly

Output Price (P) Total Marginal Total Cost Average Total Marginal
Revenue (TR) Revenue (MR) (TC) Cost (ATC) Cost (MC)
1 16 20
2 15 30
3 14 36
4 13 42
5 12 50
6 11 63
7 10 94

Total Profit = (Price – ATC) x Output

= (12 – 10) x 5

=2x5

TP = P10

1
 Price

25

20

15

10

0
1 2 3 4 5 6 7 8 Output

Natural Monopoly and Economies of Scale

Natural Monopoly exists when there is great scope for economics of scale to be exploited over a
very large range of output.

Price one firm can meet most of market demand

AC and still achieve lower average cost per unit

LRAC

Demand (AR)
50 100 200

Determinants of Monopoly
1. Government Laws and Policies
2. Technology
3. Business Policies and Practices
4. Economic Freedom