A2 U3 Markets

Video overview - http://www.economicspro.eu/vid.php?user=EconomicsPro&video_id=5

Perfect competition - http://www.economicspro.eu/vid.php?user=EconomicsPro&video_id=20

Monopolistic competition - http://www.economicspro.eu/vid.php?user=EconomicsPro&video_id=22

Oligopoly - http://www.economicspro.eu/vid.php?user=EconomicsPro&video_id=23

Monopoly - http://www.economicspro.eu/vid.php?user=EconomicsPro&video_id=21

Outline possible approaches to the problem of monopoly.

Possible approaches that could be used to deal with the problems posed by monopoly include:

- compulsory breaking up of all monopolies (monopoly busting)
- use of price controls to restrict monopoly abuse
- taxing monopoly profits
- rate of return regulation
- nationalising or taking into public ownership previously privately-owned monopolies
- privatising previously state-owned monopolies
- removing barriers to entry and regulations that previously protected monopolies

Not all these possible approaches have been used by the UK competition policy authorities and some of the policies — notably nationalisation and privatisation — are the opposites of each other and could hardly be used at the same time. Questions in the Unit 3 examination paper may well ask for analysis and evaluation of policies the authorities might use.

It is extremely unlikely, however, that questions will ask for a history of UK policy or for a description of the roles of the Competition Commission and the OFT. Although the roles of the competition authorities have been described here, this should be treated as useful background knowledge, rather than as information for students to learn in depth.

The relationship between AR and MR in monopoly

The relationship between the average and MR curves in monopoly is shown in diagram. Aa a monopolist’s demand curve slopes downward to the right (the market demand curve), an extra unit of output can only be sold by reducing the price at which all units of output are sold.

Total sales revenue increases by the area k in the diagram, but decreases by the area h. Areas k and h respectively show the revenue gain (namely the extra unit sold multiplied by its price) and the revenue lost resulting from the sale of an extra unit of output.

The revenue lost results from the fact that in order to sell one more unit of output, the price has to be reduced for all units of output, not just the extra unit sold. MR, which is the revenue gain minus the revenue loss (k − h), must be less than price or AR (area k).

Now in the top half (elastic section) of the AR curve, the area k is always larger than the area h, diagram illustrates. This means that MR is always positive under the top half of the AR curve.

However, the reverse is true under the bottom half of the demand curve. In this situation, demand is inelastic, with the result that the equivalent area k is always smaller than the equivalent area h. MR is now negative.

The final point to note is that provided the monopolist’s MR curve is linear (i.e. a straight line), the curve is twice as steep as the monopolist’s AR curve. MR falls to zero at the point where the MR curve cuts through the horizontal (output) axis of the diagram.

The rip-off world of monopoly power

www.bbc.co.uk/news/business-11549150

Can you analyse what Gavascon did wrong and relay it in a succinct way?

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