Theory question 106
Market Structures(a) Define monopoly.
(b) State any three factors that give rise to monopolies.
(c) With the aid of a diagram, explain the supernormal profit position of a monopolist.
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(a) A monopoly is a market with a single seller of a product that has no close substitute, with barriers that keep other firms out.
(b) Any three: patents and copyrights; government licence or law (statutory monopoly); sole control of a raw material; economies of scale (natural monopoly); huge capital requirement; mergers/cartels.
(c) The monopolist produces where MC = MR (MC cutting MR from below) and charges the price read from the AR (demand) curve at that output. Because AR is above AC at that output, it earns supernormal profit = (AR − AC) × output, shown as the rectangle between price and AC above the equilibrium output. Diagram: downward-sloping AR and MR (MR below AR), U-shaped MC and AC, shaded profit rectangle.
Read price from AR at the MC = MR output.