GOVERNMENT MONOPOLY EXAMPLES FREE

He cannot have a high price and high quantity. If he picks a high quantity, then he chooses a low price, or vice-versa. He can choose any combination of price or quantity that exists along the demand curve. So what a monopolist can do is choose just where the supply curve intersects the demand curve. So, the monopolist faces a demand curve he or she cannot change. Remember, the demand curve is defined by the marginal utility of consumption, a measure of how much happiness the consumers get from consuming. We may have a single seller, and this seller may be able to choose his price, but he cannot control the demand curve. But first, consider how a monopoly works. It is quite easy to answer this question with a supply and demand diagram. However, since we are concerned with maximizing the aggregate wealth of a society, we can ask the positive question 'does a monopoly decrease total wealth generated?' If it does, then we have the definition of a market failure. That is, should we care who gets the wealth, as long as wealth is being generated? That would be a 'normative' statement. As a disinterested economist, we might say 'who cares?' especially if we are generating wealth. This leads to an increase in the size of the producer surplus and a decrease in the size of the consumer surplus. A firm is able to earn positive economic profits, and because they are a monopoly, other firms are unable to enter their market and drive down price. In a monopoly, these competitive pressures are absent. Generally, this extra market entry is enough to increase production and decrease equilibrium price to the point where zero economic profits are seen. If firms in an industry are making positive economic profits, then other firms have an incentive to enter the market to try and deliver these positive profits to their owners. In a competitive market, it is the act of competition that drives prices towards the equilibrium price and quantity at which the marginal firm makes zero economic profits - they are earning just enough money to cover their costs of production and to pay their owners a return that is sufficient to cover their risks. In a monopoly, a firm will typically make greater than zero economic profit (remember that term?).

A higher price than the equilibrium price in a competitive market.

A lower quantity of goods produced and consumed than in a competitive market.

A market in which there is a monopoly will generate less wealth for a society than a competitive market would. They are undesirable, or 'bad,' because in this case 'bad” means less than the most possible total wealth – the sum of the producer and consumer surpluses. Monopolies are typically assumed to be undesirable market structures. Firms in a case such as this may have a lot of market power, and may face a lot of scrutiny from the government, but they are not technically monopolies. If a firm obtains an inordinate market share due to offering a product that many people want to buy, we do not have a monopoly. These are not monopolies, in that firms in these markets do have competitors, and consumers do have choices. We will talk more about natural monopolies a bit later in the course.Īt this point, you might think about some markets that have a dominant market share held by a single firm, such as Microsoft in the market for spreadsheet software.

A Natural Monopoly exists (e.g., your local power company).The government allows a monopoly to exist (not common in the US, but in many countries things like airlines or railways are government-designated monopolies).All of some resource is owned by some firm (e.g., deBeers and diamonds).There are three ways that a monopoly can exist and/or persist: He cannot have a high price and a high quantity of sales – if he has a high price, people will buy less.

GOVERNMENT MONOPOLY EXAMPLES FREE

A monopolist is free to set prices or production quantities, but not both because he faces a downward-sloping demand curve. A monopoly is a market with only one seller. This is the most extreme, but not the most common, example of market power. If you are able to move the equilibrium price with your own choices, then you can be referred to as a 'price-setter.' In reality, in many situations, somebody in the market has some power to change prices through their individual actions. Hence, you have to 'take' whatever the price is.

In this case, the equilibrium price in a market is defined by so many different transactions that anybody who wishes to buy or sell in this market has to do so at the market equilibrium price, and they are not able to move the equilibrium price with their own actions. Our first assumption is that of market power, which states that everybody is a price taker, or that there are many buyers and sellers in a market. For this section, please read Chapter 11: 'Price Searcher Markets with High Entry Barriers.' from Gwartney et al.įrom Greenlaw et al.

Government monopoly examples