Question

"Monopolies strangling economy". with the aid of a diagram, explain the economic theory that supports this statement.

Answer 1

Definition

Monopoly refers to a market condition when there is only one seller in the market with no competitors.The term monopoly is often used to describe an entity that has total or near-total control of a market. One example is Railway sector which is only regulated by the government. Another example where there is only one source of potable water in an island which is regulated by one entity.

Monopolies strangling economy

Monopolies typically have an unfair advantage over their competition since they are either the only provider of a product or control most of the market share or customers for their product.

• Barriers: In a monopolistic market there are entry and regulatory barriers.
• Single Seller : There is only one seller in the marked therefore no competition and choice between products.
• Price Maker: In a monopoly the seller is the price maker not a taker therefore there can be inexorability high prices of goods and services.

Here P_m = Prices of goods and services in monopoly.

P_c = Prices under perfect competition.

• A higher price of goods would ultimately mean a lower demand of goods and services may mean a slowdown/recession in the economy which would yield lower investments.
• Low employment levels.
• High risk of bureaucracy.
• Unequal distribution of incomes.