Cambridge Syllabus Notes

📈 Different Market Structures: Monopoly

What is a Monopoly?

A monopoly exists when a single firm is the sole supplier of a product or service with no close substitutes. Think of a town that only has one water company – you have no choice but to pay them for water. In a monopoly, the firm has significant control over price and output.

Key Characteristics

Single seller, no competition.
High barriers to entry (e.g., patents, control of essential resources).
Price‑setter: the firm chooses price to maximise profit.
Product is unique or has no close substitutes.

Pricing Power & Profit Maximisation

Monopolists set output where marginal cost (MC) equals marginal revenue (MR). The price is then read from the demand curve at that quantity.

Mathematically:

$MR = MC \quad \text{and} \quad P = D(Q)$

Because they can charge a higher price than in competitive markets, monopolists often earn economic profits in the long run.

Efficiency Issues

Monopolies can lead to:

Allocative inefficiency: Price > marginal cost ($P > MC$), so some consumers who value the product more than its cost don’t get it.
Productive inefficiency: Firms may not operate at the lowest possible cost due to lack of competitive pressure.

Real‑World Example: Digital Platforms

Consider a social media platform that is the only major choice for users in a country. It can set higher advertising rates because advertisers have no alternative platforms to reach the same audience. This gives the platform monopoly power.

Exam Tip Box

Tip: When answering exam questions on monopolies, remember to:

Identify the firm’s market power.
Show the MR = MC condition and explain how the price is set.
Discuss allocative and productive inefficiencies.
Use real‑world examples to illustrate points.

Monopoly vs. Other Market Structures

Structure	Number of Firms	Price Control	Barriers to Entry
Monopoly	1	High	High
Oligopoly	Few	Moderate	Moderate
Monopolistic Competition	Many	Low	Low
Perfect Competition	Many	None	None

monopoly