Using an appropriate diagram, explain how a monopolist might be able to make supernormal (abnorma...

1. Definitions

1.1. Monopolist

1.1.1. A firm/producer who has the majority of the market power in the particular industry, often the sole producer of a product.

1.2. Abnormal profits

1.2.1. Extra profit above the level of normal profit, where revenue > costs

2. Short-run

2.1. Definition

2.1.1. Quantity of factors of production are fixed, except for quantity of labour.

2.1.2. Firms can only influence prices through adjustment to production.

2.2. Diagram of abnormal profits

2.2.1. Abnormal profits are being made due to the industry price (P1) being greater than the cost (C). They can be calculated by P1 - C per unit or (P1 - C) x Q1 as a total, shown with the shaded rectangle.

2.2.2. The monopoly is still producing at the profit-maximising quantity of Q1, where MC = MR.

2.2.3. Charge higher prices with lower quantity produced than other market types (monopolistic/perfect competition)

2.3. Why?

2.3.1. Monopolists are price makers

2.3.1.1. Sole producer, or almost sole producer, meaning that they are essentially the industry themselves and leave consumers with no other alternative to buy that particular product from

2.3.2. High barriers to entry

2.3.2.1. The large monopolies who benefit from economies of scale, such as from, lower average costs make it very hard for new firms to be able to compete effectively

2.3.2.1.1. Monopolies can push out newer, smaller firms

2.3.2.2. Legal barriers - Intellectual property rights (e.g. patents, copyright, trademark) give exclusive rights of producing a product for a period of time, giving them monopolistic power

2.3.2.3. Brand loyalty - consumers will stick with the well-known brand that they are familiar with regardless if another brand is of higher quality

2.3.2.4. Anti- competitive behaviour, such as starting a price war where the monopoly will drop the price to result in losses only it can sustain, forcing smaller firms out of the market

3. Long-run

3.1. Definition

3.1.1. A period of time in which all factors of production and costs are variable and firms are able to adjust all costs/prices.

3.2. Diagram of abnormal profits

3.2.1. https://drive.google.com/open?id=0BzbGPyhy6eExYlpFZU91TGRtbGc

3.2.2. *Same diagram, same explanation as short-run

3.3. Why are abnormal profits still being made?

3.3.1. Effective barriers to entry

3.3.1.1. No firms can enter the market as they would from the attractive prospect of profits, and compete the abnormal profits away as they usually would have in a more (perfectly) competitive market

3.3.1.2. Firms in this situation will continue to make abnormal profits until the barriers to entry lower