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1. Monopoly is a market form where there is only one firm supplying the market, so the
firm is the industry. Monopolies have high barriers to entry, enabling them to make
abnormal profits in the long run.
2. Barriers to entry are obstacles in the way of potential newcomers to a market, such as
huge economies of scale, brand loyalty and legal protection.
3. Natural monopoly is said to exist if the market size in relation to the available production
technology is such that two firms cannot profitably exist. There are only enough
economies of scale available in the market to support one firm.
1. Economies of scale
● A large monopoly experiences economies of scale.
● A new firm would be making losses if they enter a market where it is a monopoly as the
production costs would be higher.
2. Natural monopoly
● Occurs when there is only enough economies of scale to support one firm in the industry.
● When another firm enters the industry, they would take the demand from the monopolist
and the monopolist’s demand curve shifts to the left.
● Will only result in abnormal profits for firms.
3. Legal barriers
● A firm might have legal right to be the only firm in the industry.
● Examples include patents, copyrights and trademarks.
4. Brand loyalty
● Monopolist produced a product that has gained brand loyalty.
● New firms won’t be able to compete as the loyalty to one firm is too strong.
5. Anti-competitive behavior
● Monopolists might make legal or illegal moves to be the only firm in the market, such as
reducing their price very low to remove new firms from competition.
Profit Maximization
● Happens where MC = MR.
Revenue maximization
● Happens where MR = 0.