Discuss The Advantages And Disadvantages Of Monopoly
A monopoly is a market with a single firm that produces a good or service for which there is no other close substitute that exists due to the protection the firm enjoys as a result of barriers that keeps other firms from entering the same market (Parkin 2013). In a pure monopoly the diagram for short run and long run is the same. Supernormal profits occur when an organisation makes more than the maximum competitive market profits. This is when total revenue is always greater than the total costs. The diagram below depicts a monopoly in both the short run and long run. Pure Monopoly Diagram for Short and Long run. (Parkin, M. 2013: Fig 13.4 pp287)
In a competitive market profits maximisation occurs where MR=MC. Therefore the extra profits
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One firm producing a product, the society suffers from excess pricing, due to allocative inefficiency in a monopoly. Monopoly can decrease production and avail less to consumers at a higher price with the sole aim of maximising profits. The monopoly market output is reduced to monopolistic quantities (QM) instead of the quantities (QC) (depicted in the diagram above) which could be produced in a competitive market.
Due to an entity being the sole supplier it eventually enjoys the benefits of economies of scale due to massive volumes it produces resulting in lower unit average costs in the
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This is very common in holiday resorts holiday facilities and sports calendar depended services. One such example is when there was a surge in demand of such facilities during the world cup 2010 in South Africa. Unique scenarios that can help an entity to continue making profit in the long run equilibrium are,
• Having a unique natural advantage over competitors’ example strategic location, very common in open market stalls where someone selling goods close to the entry areas always sells better than the rest of the market stalls.
• An entity may have a closely managed innovative patent that allows them to produce their goods at slightly lower costs than the rest of the competition. This is sustainable but until the patent expires or the secret is out here. In South Africa the patent is valid for protection for up to maximum of 20 years thereafter everyone can use the same formula. (South Africa Patents Amendment Act No. 58 of 2002).
• An entity may enjoy profits from benefits a high economies of scale, if it had invested in expensive machinery in early days before
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