-7429508094345Ayesha Liyaagama 2483008 | ECON 210 | April 19, 201800Ayesha Liyaagama 2483008 | ECON 210 | April 19, 2018133350-3646170Weekly Problem Set
Week 5Submitted to Dr Jack Patel,
Professor of Economics, ERAU Asia
950000Weekly Problem Set
Week 5Submitted to Dr Jack Patel,
Professor of Economics, ERAU Asia
Theoretical Question
Describe and explain the assumption of a monopoly.

Monopoly is the type of a business which dominates a given market. The word ‘mono’ means single and ‘poly’ means control. It means only one company may offer product or services for consumers. Koutsoyiannis (n.d.) defines a monopoly as a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry.

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The power of a monopoly will vary in following sequence.

Pure monopoly > Normal monopoly > Working monopoly > Duopoly > Oligopoly
Pure monopoly-Depends on 100% domination. (J. Patel, personal communication, April 16, 2018)
Working monopoly – A firm which exceeds 25% of sales. (Tutor2u, 2015).Duopoly – Two suppliers dominate the market. Example: Airbus and Boeing
Oligopoly – A market structure where few firms dominate. Example: Subway, McDonalds, KFC
Monopoly meets following assumptions:
One seller and large number of buyers- Since there is one supplier there will be large number of buyers demanding from the same firm. Example : Singapore Press Holdings ( SPH)
Restrictions on the entry of new firms – This is one of the main reasons why a monopoly arises and gets stabilized. There are three main barriers. They are a) Legal barriers
b) Structural barriers
c) Strategic barriers
Legal barriers are the government acts and regulations. Examples: Public franchise, patents, registration, certifications, license, taxes and tariffs etc. These legal barriers are granted to a firm by the government to limit or exclude the entry of other new firms.

Structural barriers emerge from the technical and structural characteristic of an industry. Availability to firms of economy of scale, product variation and the size of firm can be considered as structural barriers.

Strategic barriers are formed by established forms to obstruct the entry of new firms. These are also known as artificial barriers.

No close substitute – In a monopoly, the monopolist is the only one who carries out the certain product or service. It means that consumers could buy the product only from one firm. Therefore no close substitutes could be found. Example : Electricity board
Price maker – Monopoly has a lack of competition. Therefore it is the price maker. Monopolists set their price limit to a point where they can receive a maximum profit.

Price Discrimination – Price discrimination occurs when a firm charges different prices to a certain group of buyers for a specific product or service, for reasons not related to cost of supply. (Tutor2u, n.d.) Example: Different rates for students and senior citizens to travel by MRT, 1st class, Business class and Economy class in air travel and Discounts at restaurants for students. Extra revenue, use up spare capacity, higher profits and improved cash flow can be considered as aims of price discrimination. There are three types of price discrimination. They are Perfect price discrimination where the situation when charging the price each consumer is willing and able to pay, The second degree price discrimination is when the seller charges a uniform price per unit and charge less for an additional quantity. Example : Getting 10% discount for the 3rd item and Buy one for $3 and two for $5 dollars kind of offers.

Downward sloping demand curve –Unlike in perfect competition, since the monopoly is the one who set the price in market, its demand curve is also downward sloping as in the market. This contains an inverse relationship between the price and the quantity.

Monopoly is also an industry – since there is a single firm, it is also the one which supply the certain product or service. Example: Jabatan Bekalan Air Malaysia only industry which supply water to the whole country.

Reference : Assumptions of Monopoly Market. (2016, March 20). Retrieved from https://studymoose.com/assumptions-of-monopoly-market-essayB. (n.d.). Boundless Economics. Retrieved from https://courses.lumenlearning.com/boundless-economics/chapter/introduction-to-monopoly/B. (n.d.). Boundless Economics. Retrieved from https://courses.lumenlearning.com/boundless-economics/chapter/perfect-competition/Monopoly: Meaning, Definitions, Features and Criticism. (2015, August 10). Retrieved from http://www.economicsdiscussion.net/monopoly/monopoly-meaning-definitions-features-and-criticism/7268Tutor2u Follow. (2015, February 01). Tutor2u – Market Failure – Monopoly Power. Retrieved from https://www.slideshare.net/tutor2u/tutor2u-market-failure-monopoly-power


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