Analysis of Monopoly and Monopolistic Competition in Economics Report

This economics report provides a detailed analysis of monopoly and monopolistic competition market structures. It examines the characteristics of each market type, including the determination of price and quantity sold, and the economic profit earned in both the short run and long run. The report explores the efficiency of resource allocation in these markets, comparing them with perfectly competitive industries. Real-world examples, such as the water supply and café coffee industries, are used to illustrate the concepts. The report also discusses the factors influencing the entry of new firms into these industries and offers insights into strategic decisions, such as advertising and research and development, for businesses operating in monopolistic competition.

ECONOMICS

TABLE OF CONTENTS
Characteristics of the monopoly market......................................................................................3
Price and quantity sell decision...................................................................................................3
Economic profit in short run........................................................................................................3
Economic profit in long run.........................................................................................................4
5 Efficiency of water supply and perfectly competitive industry................................................4
6 Water supply industry for new firms........................................................................................5
Second part......................................................................................................................................5
1Characterisitcs of the monopolistic industry.............................................................................5
2 Determination of price and quantity sold.................................................................................5
3Economic profit in short run......................................................................................................5
4 Economic profit in long run......................................................................................................6
5 Economic efficiency of monopolistic and perfect competition................................................7
6 Issues of café coffee industry...................................................................................................7
REFERENCES................................................................................................................................8

Characteristics of the monopoly market
 Only one seller: In the monopoly market always one seller exist in the market. In UK
supermarket industry there are multiple players (Bagdikian, 2014). Due to this reason
supermarket cannot be included in the monopoly market.
 Super normal profit: Firms operating in monopoly earn super normal profit in their
business. UK supermarkets are running in loss or earn low profit in business. Thus,
supermarkets are not in monopoly market.
Price and quantity sell decision
Firms that are in monopoly market charge a price on product at their own discretion.
Quantity sell is determined by considering market demand. National grid is privately owned but
regulated by government in order to protect customer’s interest (Merhav, 2013). Tesco comes in
category of private monopoly because in UK it is assumed that firm if have more than 25% share
in industry is in monopoly.
Economic profit in short run
Firm in the monopoly market earn economic profit because it is only player in the market
which can offer relevant product to the customers.
Figure 1Economic profit in short run
(Source: Carey, Mitchell and Lowe, 2013)
Chart revealed that average revenue is greater than average cost which reflects that firms
earn supernormal profit in the business (Carey, Mitchell and Lowe, 2013). In case of private

monopoly supernormal profit can be earned by the firm but in case of regulated monopoly less
amount of supernormal profit is gained by the business firm.
Economic profit in long run
Figure 2 Economic profit in long run
(Source: Collins and Butler, 2015)
Economic profit is earned by the firms in long run. It is stated because diagram reveal that firms
earned super normal profit KPHN in their business. Thus, in long run also same level of profit is
earned by the business firm. In case of private and regulated monopoly economic profit is easily
earned by the firms.
5 Efficiency of water supply and perfectly competitive industry
 Productive efficiency: Productive efficiency refers to the efficiency with which optimal
combination of resources is used for production of goods and services. Allocative efficiency: It refers to the efficiency with which by considering customer
preference varied products are made available by the supermarket to the relevant entity.
 Dynamic efficiency: It refers to the firm efficiency to reduce cost by introducing new
process at the plant or premises.
In the perfect competitive industry best allocation of resources happened in comparison
to monopoly because in former one varied firms operate and resources are limited. Hence, all of

them try to make best use of the resources in the business (Haaland and Venables, 2016). In
water supply industry over allocation of resources is done by the UK government. Hence, water
which is resource is allocated to excessive level in the UK. Thus, economic efficiency is not
good in the UK water industry.
6 Water supply industry for new firms
Entry in to water supply industry is not desirable by new firms because resource is over
allocated. Moreover, government have strong control on number of customers that firm will have
in its business (Parenti, Ushchev and Thisse, 2017). Hence, there is less competition and profit in
water supply industry. Due to this reason none of firm desired to enter in to relevant industry.
Second part
1Characterisitcs of the monopolistic industry
 Large number of buyers and sellers: In the monopolistic industry there are large number
of buyers and few sellers (Efficiency in monopolistic competition, 2017). On the basis of
product differentiation firms compete with each other in relevant market.
 Lack of perfect knowledge: In the monopolistic industry there is lack of perfect
knowledge among people about the product offered by the business firms.
2 Determination of price and quantity sold
In monopolistic market price is determined by the business firms by evaluating strategy
that is followed by the competitors (Vetter, 2016). Quantity that must be produced is determined
by considering demand of product in the market.
3Economic profit in short run
In the monopolistic market in short run economic profit is earned by the firm in the market.
This happened because in short run firm produce quantity that correspond to MC=MR.

Figure 3Monopolisitc competition short run economic profit
(Source: Andersen and Bhattacharya, 2016)
4 Economic profit in long run
In long run firms in the monopolistic market does not earn economic profit in the business.
This is because productive and allocation efficiency in case of the firms operating in
monopolistic market get increased.
Figure 4Long run economic profit
(Source: Sakane, 2016)

5 Economic efficiency of monopolistic and perfect competition
Monopolistic market is less efficient than perfect market. This is because in the perfect
competition market there are large number of firms and due to this reason resources allocated in
better way (Kwan, 2016). There is huge competition in the market and due to this reason firms
make best allocation of resources among their productive tasks. Due to this reason economic
efficiency is high in case of monopolistic then perfect market.
6 Issues of café coffee industry
 New firms would not like to enter in to coffee industry because in monopolistic market in
long run firm does not earn economic profit in business.
 Large amount must be spend on advertisement because by doing so firm can increase
memory retention of its brand name among the people (Zeng, 2016).
 Small amount of expenditure must not be made on advertisement. This is because
relevant strategy will not work out.
 Expenditure must be made on R&D so that process can be simplified and cost can be
reduced which will lead to earning of economic profit in business.
 Coffee shop can spend significant amount of money to develop new variant of coffee
because cost for same will be low.

REFERENCES
Books and journals
Andersen, T.M. and Bhattacharya, J., 2016. The Intergenerational Welfare State and the Rise and
Fall of Pay‐as‐you‐go Pensions. The Economic Journal.
Bagdikian, B. H., 2014. The new media monopoly: A completely revised and updated edition
with seven new chapters. Beacon Press.
Carey, S. C., Mitchell, N. J. and Lowe, W., 2013. States, the security sector, and the monopoly of
violence: A new database on pro-government militias.Journal of Peace Research. 50(2).
pp.249-258.
Collins, N. and Butler, P., 2015. A marketing perspective on the rise of China: monopoly,
politics and value. Journal of Marketing Management. 31(3-4). pp.269-288.
Haaland, J. I. and Venables, A. J., 2016. Optimal trade policy with monopolistic competition and
heterogeneous firms. Journal of International Economics. 102. pp.85-95.
Kwan, C.Y., 2016. Increasing returns, individuality and use of the common pool. Australian
Journal of Agricultural and Resource Economics. 60(1). pp.97-111.
Merhav, M., 2013. Technological dependence, monopoly, and growth. Elsevier.
Parenti, M., Ushchev, P. and Thisse, J.F., 2017. Toward a theory of monopolistic competition.
Journal of Economic Theory. 167. pp.86-115.
Sakane, H., 2016. Asymptotic stability of a general equilibrium under perfect and monopolistic
competition. Journal of Mathematical Economics. 63. pp.21-26.
Vetter, H., 2016. Tax Reform in Monopolistic Competition with Increasing Preferences for
Variety. Public Finance Review. 44(2). pp.245-262.
Zeng, D. Z., 2016. Capital mobility and spatial inequalities in income and industrial location. The
Journal of Economic Inequality. 14(1). pp.109-128.
Online
Efficiency in monopolistic competition, 2017. [Online].Available through :<
https://www.boundless.com/economics/textbooks/boundless-economics-textbook/
monopolistic-competition-12/monopolistic-competition-75/efficiency-of-monopolistic-
competition-286-12383/>. [Accessed on 28th January 2017].