Term paper on Economics Monopoly market

Basically monopoly means the existence of only one producer (and seller) on the market of a certain product. It is known that this kind of market organization may be formed by a government, or as a result of several big sellers merger or it may also be created naturally. (Buchanan 1977, n.a.0

The major characteristics of the monopoly include the following:
The profit is maximized;
The price of product is made by the only one seller;
There is a high barrier to entry a market (other possible participants are not able to enter it for some reasons);
There is a single seller on the market;
The price and the quality of the product is changed in accordance with the monopolist’s decisions;
Under condition of high market elasticity, the monopolist is able to sell more quantities by the lower price
Under condition of lower market elasticity, the monopolist is able to sell less quantities and their price is higher.

Monopolies may be divided into the following groups: absolute monopoly, limited monopoly, private monopoly, public monopoly, simple monopoly, discriminating monopoly, legal monopoly, natural monopoly, technological monopoly and joint monopoly.

The model of the monopoly market may be illustrated by the following chart:

Else and Curwen (1990) give the following explanation of the chart: “This is the consumer’s demand schedule. The seller chooses output qM so that marginal cost and marginal revenue are equal. Market efficiency is accomplished when output is where demand equals marginal cost. But it’s not in the interest of monopolist to producing beyond qM because of the extra benefit it wants to obtain (marginal revenue is less than the extra cost of production). It should be added that the additional output is in the interest of buyers.”

Externalities

Externalities are indirect factors; their influences are not indicated in the price of products. They are the losses or the benefits received by one party in the result of the others’ party activities (it should be mentioned there is no compensation for any party). These factors should be considered in the cost analysis.

The influence of externalities may be positive and negative.

Let’s give explain the nature of negative externalities and give their example. In general, what we know about negative externalities is that they result in lower output. Another example of externalities are the side effects of consumption like the harmful effect of smoking or drinking alcohol:

Potentially negative effects of people consuming cigarettes on other consumers are demonstrated here. If the cigarette consumer only considers their own private costs and benefits, then there will be over-consumption of the product. This chart indicates that socially efficient level of cigarette consumption will be lower (Q2). (Semmleer 1984, p.3)

Let’s continue with the example and explanation of positive externalities – from healthcare sector.

The high quality of health care services results in a positive effect for the recipients of these services. Besides it also positively influences their families, friends, and employers.

The chart shows the how the provision and consumption of health care services leads to an increase in social benefits and a reduction in social costs.