![]() ![]() The demand curve shown in Figure 1 presents the monopolist with a choice. Indeed, the availability or non-availability of close substitutes is one of the key factors determining the monopolist's power in the market. In comparison to other types of market, the monopolist's demand curve is likely to be relatively inelastic as close substitutes may not be available if price is raised. As the monopolist is subject to the normal law of demand, the monopolist's demand curve will be downward sloping so that to sell more, price would have to be lowered (see figure 1). However, under monopoly there is only one firm in the industry thus there is no difference between the demand curve for the industry and the demand curve for the firm. The demand curve for each firm is therefore horizontal: an infinite amount is demanded at one price, with nothing at all being demanded at a higher price and with the charging of a lower price being inconsistent with the goal of profit maximisation. ![]() ![]() In our analysis of perfect competition, we showed how there is a distinction between the demand curve of the individual firm and that of the market as a whole - the existence of many firms each competing against each other means that each one has no influence over price, and has to take the price that is determined in the market through the intersection of the demand and supply curves. Theory of monopoly The monopolist's demand curve A commonly used ratio is the five firm concentration ratio which indicates the proportion of the industry's output produced by the five largest firms. A firm may be regarded as being a monopolist if it controls 25 per cent or more of the total market supply of a particular good or service.Ī market concentration ratio is used to measure the degree of concentration within a particular industry or group of industries. Thus in practice, less stringent definitions than 'single producer' tend to be used and economists focus instead on the degree of monopoly power which exists rather than absolute monopoly power. Moreover, whether an industry can be classed as a monopoly will depend on how narrowly the industry is defined for example, a city underground often has a monopoly on the supply of underground travel within the city, but does not have a monopoly on all forms of public transport within the city: people can also travel by bus or overground trains. This is a situation of pure monopoly, which like the case of perfect competition, is rarely easy to identify in reality. In the literal sense, a monopoly exists when one single firm or a small group of firms acting together controls the entire market supply of a good or service for which there are no close substitutes. Monopoly, as a market form, is at the opposite end of the spectrum to perfect competition. Section 2.4 Market failure - simulations and activities.Section 2.4 Market failure - in the news. ![]() Section 2.3 Theory of the firm - simulations and activities (HL only).Section 2.3 Theory of the firm - in the news (HL Only).Section 2.3 Theory of the firm - questions (HL only).Economic efficiency in perfect competition and monopoly.Section 2.3 Theory of the firm - notes (HL only).Section 2.2 Elasticities - simulations and activities.Section 2.1 Markets - simulations and activities.Topic pack - Microeconomics - introduction. ![]()
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