• Public Goods

• Common Resources

• Externalities – Positive or Negative

• Monopolies and Oligopolies

• Information Asymmetry

When markets fail, governments may be able to correct the problem

1. How do you face competition in your daily life?2. How does competition apply to economics in a

positive and a negative way?

Many buyers and sellers in the market

Goods offered by various sellers are the same

Firms easily enter and exit the market

Buyers and sellers are well informed

Single seller in a market

High barriers to entry prevent competition

Single firm controls key resource

Government grants exclusive operating rights

Patent and Copyright System

Natural Monopolies – Economies of Scale

PerfectCompetition

PureMonopoly

MonopolisticCompetition

Oligopoly

Handful of large firms dominate a market

Products are similar but with slight differences

High barriers to entry keep new firms out

Temptation to collude but also to cheat

Many buyers and sellers in the market

Relatively low barriers of entry

Products are not all the same (differentiation)

Mini-monopolies…some control over price

MonopolyPure Monopoly - only one firm in the

industryWorking Monopoly- 25% + market share

What determines monopoly power?– the availability of close substitutes from

rival industries– ability to maintain barriers to entry

Key Features of Monopoly• There is one firm, which is also the industry• It produces a unique good/ service• There are complete barriers to entry and exit

from the industry.• Customers have only 1 firm to buy from, as

there are no direct substitutes- Limited Choice• The Firm is a ‘Price Maker’• The Firm has the ability to earn abnormal profits

in the long run• Low levels of economic efficiency- productive and

allocative efficiency not being achieved

QO

P

Short- run and long run abnormal profits

QE

PE

AR = DMR

MC

AC

Supernormal profit = (AR-AC)XQ = = TR-TC

The monopolist can maintain abnormal profits in the long run if :1.There are barriers to entry.These may be - artificial (e.g. patent, brand loyalty) or- natural (e.g. economies of scale)2.The market is not easily contestable

Long run equilibrium

MonopolyPossible barriers to entry

A clearly differentiated product with brand loyalty Economies of scale Legal/ regulatory barriers eg Patents, statutory monopoly- granted legal protection from competition eg Post Office in UK High sunk costs Ownership/control of key factors of production Other barriers- aggressive trading tactics- eg. Limit pricing (predatory pricing), the threat of aggressive merger and takeover, ownership/control of retail outlets and intimidation.

Contestable Markets: a market is perfectly contestable

1. the cost of entry and exit by potential rivals are zero

2. entry can be made very rapidly

A market is less contestable if there are:

Economies of Scale if market demand is =/> MES, then the firm is likely to be a natural monopoly

Sunk Costs: a firm’s investment e.g. specific capital, cannot be employed in alternative uses

Allocative efficiencyP = MCi.e the price a consumer is prepared to

pay = cost to society of producing an additional unit, assuming no external costs

Under PC, P = MCUnder monopoly, P > MC

Productive EfficiencyFirms are productively efficient if they

are producing at the lowest point on their lowest possible AC (ATC) curve.

Under PC firm is operating at min ATCUnder monopoly, firm operating at >

min ATC

Does the consumer always lose from monopoly?

If a monopolist faces identical costs to a perfectly competitive industry, and can prevent entry, a monopoly will result in

Higher pricesLower output

Natural Monopoly• There are some industries where EoS

are so large that competition would be neither profitable nor efficient

• Natural monopolies have continuously falling AC curves

• Egs. Electricity and gas infrastructures

Q

P

Natural Monopoly

QE

PE

AR = D

MR

MC

AC

‘Advantages’ of monopolySupernormal profits provide an incentive and a

source of funds for process and product innovation:

• new technologies that may reduce costs i.e. LRAC under monopoly < LRAC under perfect competition.

• new products increase consumer choice• E of S can lead to greater output and lower

prices than under PC