AS Economics Unit 1 - PowerPoint Presentation

Slide1

AS Economics Unit 1

Market failure: MonopolySlide2

Aim:

To understand the barriers to entry in a monopolistic market.

Objectives:All: Define a pure monopolyAll: 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.

Aims and ObjectivesSlide3

In pairs

decide on a definition of a Monopoly market.

To help you think about the objective of playing the board game monopoly.2 minsStarterSlide4

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 sharePure Monopoly DefinitionSlide5

Pure Monopolistic Market

Price

Quantity

Q1

P1

D

P2

Q2

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.Slide6

A market which is dominated by one firm.

The firm owns more than 25% of market share.

Non-Pure Monopoly DefinitionSlide7

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)MonopolySlide8

Factors which prevent firms from entering a market.

In

a monopoly barriers which exist are based on economies of scale.Barriers to EntrySlide9

L

A

M

I

N

B

R

Barriers to Entry

A Monopolistic marketSlide10

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.

BACKSlide11

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.

BACKSlide12

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!

BACKSlide13

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 scale

get larger.

BACKSlide14

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.

BACKSlide15

B: Branding

Brands have unique characteristics. Built over many years.

Created through advertising.Making demand more inelastic.

BACKSlide16

R: Research and Development

Increasing expenditure on R&D

Firms can produce products which give

them the edge over their competitors.

Charge a higher price than their

competitors.

BACKSlide17

Write down on your post it note the seven barriers to entry to monopolistic firms.

Mini PlenarySlide18

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)

Plenary: Monopoly

of French Taxi DriversSlide19

Occurs because compared to the competitive market, output falls and the price rises, leading to under consumption of the good the monopoly produces.

Monopoly and market failure