What is a monopoly?

A monopoly is a market structure where there is one single dominant firm (opposite to perfect competition). Since they dominate the market they are able to set the price because there are no close substitutes hence customers will have to purchase this firm's goods if in needed. Due to the single firm's size significant barriers of entry are created. One of many example is economies of scale. The mass production reduces the firm's average costs of production, allowing, if needed, to reduce the price of the good or significantly increase the firm's revenue. Meanwhile if a small firm was to enter the market they would have very high average costs of production causing their price of goods to be much higher driving them out of the market since consumers are not willing to spend that much money. Since there are high barriers of entry monopolistic firms are able to earn economic profit in the long run (can be shown in a graph where Price Monopoly is higher than minimum Average Total Costs Curve). Unlike in perfect competition, the high barriers of entry stops from new firms entering the market if the firm is making economic profit and capturing shares of the market.
An example of a monopoly is water and sewage providers. These firms already have their pipelines set in place around the city, seeing as everyone in the area makes use of their service it makes it cheaper to maintain the pipelines. Meanwhile, if a new company wanted to join the costs of setting up their pipelines would be way to high, driving them out of the market.

Answered by Zuzanna S. Economics tutor

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