ECON1010 Introductory Microeconomics
Introductory Microeconomics
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ECON1010
Introductory Microeconomics
LECTURE 8
Monopoly and Imperfect Competition
2Q1. A firm in a perfectly competitive industry is earning an
economic profit. An economist would predict that over
time:
a. Market supply will decrease
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b. Market demand will increase
c. The market price will decrease
d. Firms will continue to make economic profits
e. The market price will rise
Last lecture feedback
3Q2. If buyers and sellers are free to pursue their own
selfish interests, according to the invisible hand theory, the
result would be:
a. exploitation of workers and natural resources
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b. an inequitable allocation of resources
c. poor services for consumers
d. an efficient allocation of resources
e. no one being able to see what is happening in society
Last lecture feedback
4At the midway point of the course, it might be
worth reflecting on the following.
1. Are you consistently devoting 10 hours per
week to ECON1010?
2. Are you regularly reading the textbook,
attending tutorial, PASS, consultation sessions?
3. Remember, UQ has very clear policies when it
comes to assessment and passing grades, so
work toward hitting your target.
4
5Plan of Lecture 8.
Part 1
A focus on monopolies, monopoly power, and
how economic theory guides government
responses toward monopolies.
Lecture 8 ECON1010 5
Part 2
Monopolistic competition.
6Demand for Perfectly and Imperfectly
Competitive Firms
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Quantity
(units)
Price
($/unit)
Perfectly Competitive
Monopolistic
Monopoly
Oligopoly
The more inelastic is demand,
the more pricing power the firm
has and more market power.
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Perfectly Competitive Firm.
▪ demand is perfectly elastic (horizontal).
▪ is a price taker, maximising profit where
quantity exists so that P = MC.
Imperfectly Competitive Firm.
▪ faces a downward sloping demand curve.
▪ is a price maker, maximising profit at a
specific output quantity (not just selling whatever it likes and charging any price!)
8Lecture 8 ECON1010 8
Lecture Overview:
1. Definition and features of a monopoly.
2. Reasons why monopolies exist.
3. How a monopoly sets price and output.
4. Impacts a monopoly has on economic surplus.
5. Government policies to deal with monopolies.
6. The role of the ACCC.
7. Monopolistic competition.
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1. Definition and Features of a (Pure) Monopoly. Defintion:
▪ a firm that is the only seller of a product or service.
▪ it has no close substitutes.
▪ the monopoly (firm) supply is the market supply.
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Examples of a Monopoly.
a. Consider a small outback Australian town, where there is only one lawyer.
- there is no one else qualified to sign off legal
documents.
b. Power transmission lines (spatial monopoly) - an electricity generator does not own the
power lines, but needs to transmit electricity.
If only one owner of power lines = monopoly.
c. Others?
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2. Why Monopolies Exist.
i). Entry into the industry is deliberately
blocked (barriers to entry) allowing only one firm to supply the market.
▪ by governments granting a patent or copyright
to a firm for the supply of its products (eg: manufacturing drugs).
▪ by governments designating only ONE company
as a supplier of services to customers (eg: supply of electricity, gas, or water, Australia Post).
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Why Monopolies Exist.
ii). Control over key raw material resources to produce a product.
▪ A company owning 40% of the world’s
uranium deposits, as well as large amounts of the world’s other key minerals (iron ore, zinc)
▪ A quarry owner in the middle of a city supplying aggregate to concrete suppliers for
high rise construction in the CBD.
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Why Monopolies Exist.
iii) Network externalities
= a product’s usefulness increases as more consumers adopt it and use it.
▪ Microsoft Windows (95% market share in
personal computers), large take up so others adopt it in writing software.
▪ eBay and online auctions. Consumers expect many items for sale, attracts more consumers.
Why Monopolies Exist. iv) Economies of Scale (will reduce ATC)
▪ Scale is referring to how large, how big.
▪ The larger a firm’s production process
becomes, the more inputs it needs. The firm can “buy in bulk”, use better.
technology and more efficient processes. ▪ Double the input results is more than
double the output increasing returnsto scale = economies of scale.
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Possible Threats to any Monopoly’s Existence.
a. Changes to government legislation (law) to break a monopolies control and power over
consumers.
b. The rise of potential competitors who have large amounts of cash, with possibly new
improved technologies desired by consumers(evolution of markets).
c. Economic profits just so high that new
entrants are attracted. eg: Richard Branson and space tourists.