Question

Chapter 11 discusses the monopolistic and oligopolistic markets. Can you describe the basic characteristics of a monopoly? Is it subject to any competitive pressures?

Answer 1

BASIC CHARACTERISTICS OF A MONOPOLY

• There is presence of a single firm (or producer).
• Product produced under monopoly has no close substitute.
• Entry of the new firms in the monopoly market is difficult.
• Demand curve (AR curve) is downward sloping but almost inelastic as no close substitute is available.
• As the entry is restricted firm is able to earn abnormal profits in the long run.
• Price discrimination is also possible under monopoly such as first degree, second degree and third degree price discrimination.

Monopoly is not subject to any competitive pressure as it is the only single producer in the market for its product. Economies of scale can combine with the size of the market to limit the competition. Even if the second firm attempts to enter the market by producing a small quantity, its average costs turn out to be higher than the existing firm in the market and thus will make it unable to compete and drive it out of the market.