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Market failure: Monopoly. AS Economics Unit 1. Aims and Objectives. Aim: To understand the barriers to entry in a monopolistic market. Objectives: All: Define a pure monopoly All: Explain how pure monopolistic firms can restrict output and price fix.

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market failure monopoly
Market failure: Monopoly

AS Economics Unit 1

aims and objectives
Aims and Objectives

Aim:

  • To understand the barriers to entry in a monopolistic market.

Objectives:

  • All: Define a pure monopoly
  • All: Explain how pure monopolistic firms can restrict output and price fix.
  • Most: Analyse the barriers to entry in a monopolistic market.
  • Some: Evaluate the case of a monopoly.
starter
Starter
  • In pairs decide on a definition of a Monopoly market.
  • To help you think about the objective of playing the board game monopoly.
  • 2 mins
pure monopoly definition
Pure Monopoly Definition
  • A single firm produces the whole of the output of a market.
  • Faces no competition from other firms as there are no other firms in the market.
  • 100% market share
pure monopolistic market
Pure Monopolistic Market
  • Competitive market.
  • Monopolistic firm enters the market.
  • In a pure monopolistic market the firm can restrict output (Q1-Q2).
  • Market equilibrium was (Q1-P1)
  • Therefore it can charge a higher price for it’s products to make higher profits.

Price

P2

P1

D

Q2

Q1

Quantity

non pure monopoly definition
Non-Pure Monopoly Definition
  • A market which is dominated by one firm.
  • The firm owns more than 25% of market share.
monopoly
Monopoly
  • An effective monopoly must be able to exclude rival firms from the market through barriers to entry (things which stop other firms entering a market)
  • A monopoly is strongest when it produces an essential good for which there is no substitutes or when demand is inelastic. .E.g. One firm producing bread/milk. (Unrealistic)
barriers to entry
Barriers to Entry
  • Factors which prevent firms from entering a market.
  • In a monopoly barriers which exist are based on economies of scale.
barriers to entry1
Barriers to Entry

A Monopolistic market

l limit and predatory pricing
L: Limit and Predatory Pricing
  • The large monopolistic firms have the lowest costs in an industry.
  • Economies of scale.
  • Firm lowers it’s prices to a level where other firms cannot compete.
  • Driving them out of the industry.

BACK

a advertising
A: Advertising
  • Large firms can spread the costs of advertising, as they produce thousands of units.
  • New entrants to the market have to match that level of advertising expenditure but they cannot.

BACK

m multiplicity of brands
M: Multiplicity of Brands
  • Large monopolistic firms can sell a large number of different products and brands.
  • Targets multiple areas of the market.
  • Therefore attracts more customers.
  • Tesco stocks 20 varieties of apple!

BACK

i integration combining two firms
I: Integration (combining two firms)
  • As monopolistic firms get larger they can integrate, with larger firms and smaller ones.
  • This enables them to use predatory pricing more effectively.
  • Economies of scaleget larger.

BACK

n non price competition
N: Non Price Competition
  • Strategies to persuade customers to buy goods, without lowering prices.
  • Tesco Clubcard
  • 8 million users, most popular loyalty card in UK.
  • The greater the benefits for the customer, the more years that customer will remain loyal.

BACK

b branding
B: Branding
  • Brands have unique characteristics. Built over many years.
  • Created through advertising.
  • Making demand more inelastic.

BACK

r research and development
R: Research and Development

BACK

  • Increasing expenditure on R&D
  • Firms can produce products which give

them the edge over their competitors.

  • Charge a higher price than their

competitors.

mini plenary
Mini Plenary
  • Write down on your post it note the seven barriers to entry to monopolistic firms.
plenary monopoly of french taxi drivers
Plenary: Monopoly of French Taxi Drivers
  • http://www.bbc.co.uk/news/world-europe-13320358
  • What barriers to entry do you feel the new French taxi drivers facing? (2 Marks)
  • Draw the diagram to show what has been occurring in the French taxi industry prior to this firm entering the market. (4 marks)
  • What may be the effects of a new firm entering this industry? (6 Marks)
monopoly and market failure
Monopoly and market failure
  • Occurs because compared to the competitive market, output falls and the price rises, leading to under consumption of the good the monopoly produces.
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