Characteristics and Inefficiency of Monopoly Market

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Course ID

1BUSINESS ECONOMICS
Introduction
In the theory of economics, market refers to a transaction relation between group of
buyers and group of sellers. Market through the transaction mechanism ensures efficient
allocation and distribution of resources in the economy. As different group of buyers and
sellers come in the market place with the objective of making economic transaction, there is
always some degree of competition in the marketplace. In some market sellers dominate
while in others buyers may be in the dominating position. The varying degree of competition
separates market into four major groups. Perfect competition is a market form where fair
degree of competition prevails between large group of buyers and sellers (Stiglitz &
Rosengard, 2015) Resources are efficiently allocated in this market ensuring maximum social
welfare. Monopoly in contrast is a form of market that involves only one single seller and
large group of buyers. The essay briefly summarizes basic characteristics of a monopoly
market and the resulted inefficiency drawing special reference from monopoly of Australian
post.
Analysis
Characteristics of monopoly
Monopoly is defined to be market structure dominated by a single seller. The main
characteristics of monopoly market are as follows
Buyers and sellers: In the monopoly market, there is a single firm. There is however a large
group of buyers demanding the product in the market.
Nature of the product: The monopolist sells a unique product having no close substitute
nearby.

2BUSINESS ECONOMICS
Entry barriers: Entry is strictly restricted in the monopoly market. New firms are prevented
either by legal or by natural barriers.
Market power: Given the fact that monopolist is the single seller in the market and entry is
strictly restricted monopolist enjoys maximum market power (Zeuthen, 2018) Monopolist has
the price making power.
Industry: As there are no other firms operating with the monopolist, the monopoly firm is the
industry as well.
Short run
Objective of the monopolist is to maximize its profit. There are two necessary
conditions for achieving this. First, marginal revenue that is revenue obtained from selling
last unit of the product should be equal to the marginal cost that is cost incurred to produce
last unit of the output at the equilibrium point. Second, curve showing marginal cost should
cut the curve of marginal revenue from below (Kolmar, 2017). Monopolist mostly earns more
than normal profit in the short run. Monopolist may also continue production in a situation of
short run loss given that firm is able to recover its costs fully.
Long run
Long run is a period of time during which the monopolist has sufficient time and
opportunity for expanding the plant. As monopolist enjoys the complete control in the
market, it is not compulsory to expand the plant size fully. The monopolist is able to produce
at the falling part of long run average cost and reap a supernormal profit in the long (Mochrie,
2015). Unlike perfect competition, it is the case the that firm in the monopoly market operate
to the minimum point off long run average cost and earns only normal profit.