monopoly

Cambridge International AS & A Level Economics – Complete Revision Notes

1. AS‑Level Foundations (Syllabus 1.1 – 6.5)

1.1 Scarcity, Choice & Opportunity Cost

• Resources are limited → societies must decide how to allocate them.
• Opportunity cost = value of the next best alternative foregone.
• Illustrated with a Production Possibility Curve (PPC):
  • Points on the curve = efficient production.
  • Inside the curve = inefficiency (under‑utilisation).
  • Outside the curve = unattainable with current resources.
  • Movement along the curve shows trade‑offs; the slope = marginal rate of transformation (MRT).

1.2 Economic Methodology

• Positive vs. normative statements.
• Use of models: assumptions, ceteris paribus, diagrammatic analysis.
• Data sources: primary (surveys, experiments) and secondary (government statistics, World Bank).

2.1 Demand & Supply (Micro‑economics)

• Demand: relationship between price and quantity demanded (downward sloping). Law of Diminishing Marginal Utility.
• Supply: relationship between price and quantity supplied (upward sloping). Law of Diminishing Returns.
• Market equilibrium: Qd = Qs → price Pₑ, quantity Qₑ.
• Shifts vs. movements:
  • Shift: change in non‑price determinants (income, tastes, technology, input prices, expectations, number of buyers/sellers).
  • Movement: change in price along the same curve.

2.2 Elasticities

Elasticity	Formula	Interpretation
Price elasticity of demand (PED)	%(ΔQd) / %(ΔP)	|PED| > 1 elastic, =1 unit‑elastic, <1 inelastic.
Price elasticity of supply (PES)	%(ΔQs) / %(ΔP)	Steeper supply → more inelastic.
Income elasticity of demand (YED)	%(ΔQd) / %(ΔY)	Positive = normal good; negative = inferior good.
Cross‑price elasticity (XED)	%(ΔQd of A) / %(ΔP of B)	Positive = substitutes; negative = complements.

2.3 Government Intervention in Markets

• Price ceilings (e.g., rent control) – set max price < equilibrium → shortage.
• Price floors (e.g., minimum wage) – set min price > equilibrium → surplus.
• Taxes – shift supply curve upward (tax on producers) or shift demand downward (tax on consumers). Creates DWL.
• Subsidies – shift supply downward (producer) or demand upward (consumer). Can cause over‑consumption.
• Regulation – standards, licences, safety requirements.

3.1 Aggregate Demand & Aggregate Supply (Macro‑economics)

• AD: total spending at each price level; components: C + I + G + (X‑M).
• SRAS: short‑run upward sloping (price‑wage rigidity).
• LRAS: vertical at full‑employment output (potential GDP).
• Equilibrium: intersection of AD and SRAS; shifts cause inflationary/deflationary gaps.

3.2 Economic Growth, Unemployment & Inflation

• Growth measured by % change in real GDP; driven by increases in capital, labour, technology.
• Unemployment types: frictional, structural, cyclical, seasonal.
• Inflation measured by CPI or RPI; causes: demand‑pull, cost‑push, built‑in.
• Phillips Curve – short‑run inverse relationship between unemployment and inflation; long‑run vertical at natural rate of unemployment.

4.1 Fiscal Policy

• Government spending (G) and taxation (T) are the main tools.
• Expansionary: ↑G or ↓T → AD shifts right → higher output & price level.
• Contractionary: ↓G or ↑T → AD shifts left.
• Multiplier effect: k = 1 / (1‑MPC) (simple) or k = 1 / (MPS + t + m) (including taxes & imports).

4.2 Monetary Policy

• Conducted by the central bank (e.g., Bank of England).
• Instruments: open‑market operations, reserve requirements, policy interest rates.
• Expansionary: ↓interest rates → ↑investment & consumption.
• Contractionary: ↑interest rates → ↓investment & consumption.
• Transmission mechanisms: interest rate, exchange rate, asset‑price, credit‑channel.

4.3 Supply‑Side Policies

• Improve LRAS: deregulation, privatisation, tax reforms, education & training, R&D incentives.
• Goal: increase productivity, reduce structural unemployment.

5.1 International Trade & Balance of Payments

• Benefits: comparative advantage, larger market, economies of scale.
• Costs: terms of trade deterioration, domestic industry loss, adjustment costs.
• Balance of Payments (BOP) components: current account, capital account, financial account, errors & omissions.
• Trade surplus/deficit impacts exchange rates and foreign exchange reserves.

5.2 Exchange Rate Regimes

• Floating: market determines rate; central bank may intervene.
• Fixed (pegged): government commits to a target rate; requires large reserves.
• Managed float (dirty float): occasional intervention to smooth volatility.

5.3 Development Economics

Indicator	What it measures	Typical threshold (World Bank)
GNI per capita	Average income of residents	Low‑income: ≤ $1 040
Human Development Index (HDI)	Composite of life expectancy, education, GNI	Very high: ≥ 0.800
Multidimensional Poverty Index (MPI)	Deprivations in health, education, living standards	Lower is better

2. A‑Level Microeconomics (Syllabus 7.1 – 7.8)

7.1 Utility & Indifference Curves

• Utility = satisfaction; marginal utility declines (diminishing marginal utility).
• Indifference curve (IC): all bundles giving same total utility.
  • Higher IC = higher utility.
  • ICs are convex to the origin (diminishing MRS).
• Budget line: PₓX + PᵧY = I. Optimal choice where highest IC is tangent to budget line → MRS = Px / Py.

7.2 Market Structures Overview

• Perfect competition, monopolistic competition, oligopoly, monopoly.
• Key comparison: number of firms, product differentiation, entry barriers, price‑setting power.

7.3 Cost & Revenue Analysis (for all market structures)

• Short‑run: TC = TFC + TVC; AVC, AFC, ATC, MC.
• Long‑run: all inputs variable; LRAC shows minimum achievable ATC.
• Revenue: TR = P × Q; AR = TR / Q; MR = ΔTR / ΔQ.
• Profit = TR – TC; loss = TC – TR.

7.4 Profit Maximisation & Loss Minimisation

• Rule: MR = MC (choose Q where marginal revenue equals marginal cost).
• Check price relative to ATC:
  • P > ATC → economic profit.
  • P = ATC → normal profit (break‑even).
  • P < ATC → loss (continue in short‑run if P > AVC).

7.5 Market Failure & Government Intervention (Micro)

• Externalities (positive/negative) → need for taxes, subsidies, regulation.
• Public goods – non‑rival, non‑excludable → free‑rider problem → government provision.
• Information asymmetry – e.g., adverse selection, moral hazard → regulation, certification.

7.6 Monopoly (Expanded)

7.6.1 Definition

A monopoly is a market structure in which a single firm is the sole supplier of a product with no close substitutes. The firm therefore enjoys substantial market power and can influence the price of its output.

7.6.2 Sources of Monopoly Power

1. Legal barriers – patents, copyrights, licences, government‑granted exclusive rights.
2. Control of essential resources – ownership of a unique raw material or technology.
3. Natural monopoly – very high fixed costs and economies of scale make a single firm cheaper than any combination of firms.
4. Network effects – the product’s value rises as more people use it (e.g., social‑media platforms).
5. Strategic barriers – predatory pricing, aggressive product differentiation, vertical integration.

7.6.3 Cost‑Curve Recap (required for profit‑maximisation)

• Short‑run marginal cost (SMC) – extra cost of producing one more unit; typically U‑shaped.
• Long‑run average cost (LRAC) – average cost when all inputs are variable; shows the minimum possible cost at each output level.
• Monopolist compares marginal revenue (MR) with marginal cost (MC) (short‑run or long‑run as appropriate).

7.6.4 Demand, Revenue and the MR Curve

The monopolist faces the whole market demand curve, which is downward sloping. Because a lower price must be charged to sell additional units, marginal revenue lies below the demand curve and falls twice as fast.

For a linear demand curve P = a – bQ, the marginal revenue is:

MR = a – 2bQ

Graphically, MR has the same vertical intercept as demand but twice the slope.

7.6.5 Profit‑Maximisation (Margin‑Decision Making)

1. Set MR = MC to find the profit‑maximising output Qₘ.
2. Read the corresponding price Pₘ from the demand curve.
3. Since MR lies below demand, Pₘ > MC → a markup over marginal cost.
4. Compare Pₘ with ATC:
   • Pₘ > ATC → economic profit.
   • Pₘ = ATC → normal profit (break‑even).
   • Pₘ < ATC → loss (possible in the short run if Pₘ > AVC).

7.6.6 Welfare Implications

Concept	Monopoly Outcome	Implication
Allocative efficiency	P > MC	Under‑consumption; dead‑weight loss (DWL) between Qₘ and the socially optimal quantity Q_c where P = MC.
Productive efficiency	MC not at the minimum of LRAC	Possible productive inefficiency – firm may operate on a higher part of the LRAC curve.
Equity	Higher prices for essential goods	Low‑income consumers may be excluded; justification for regulation or public provision.

7.6.7 Price Discrimination

Charging different prices to different consumer groups for the same product, provided:

• Resale between groups is impossible or costly.
• The groups have different price elasticities of demand.

Three degrees:

1. First‑degree (perfect) discrimination – each consumer pays his/her maximum willingness to pay; captures the entire consumer surplus; can eliminate DWL.
2. Second‑degree discrimination – price varies with the quantity purchased (e.g., bulk discounts, versioning of software).
3. Third‑degree discrimination – different groups are charged different prices (e.g., student discounts, geographic pricing).

Equity concerns arise because some groups may bear a higher burden.

7.6.8 Natural Monopoly

• Occurs when a single firm can supply the whole market at a lower average cost than any combination of firms because of very high fixed costs and strong economies of scale.
• Typical industries: electricity distribution, water supply, railways, postal services.
• Because competition would be wasteful, governments usually regulate or publicly own the service.

7.6.9 Regulation of Monopolies

• Price‑cap (price‑ceiling) regulation – a maximum price is set, often using a cost‑plus formula: Price = AC + Allowed Rate of Return.
• Rate‑of‑return regulation – the firm may earn a normal profit on its capital base, preventing excessive pricing while ensuring efficient provision.
• Public ownership – the state owns the monopoly, aligning profit motives with social welfare.
• Promoting competition – breaking up the monopoly, removing legal barriers, or encouraging entry (e.g., telecom liberalisation).

7.6.10 Key Formulas

• Linear demand: P = a – bQ
• Corresponding MR: MR = a – 2bQ
• Profit‑maximisation: MR = MC
• Consumer surplus (CS): area under demand curve above price paid.
• Producer surplus (PS): area above MC and below price received.
• Dead‑weight loss (DWL): area between demand and MC from Qₘ to Q_c.

7.6.11 Suggested Diagram

Label the following on a single graph:

• Downward‑sloping demand (D) and MR (steeper, same intercept).
• Upward‑sloping MC.
• Equilibrium where MR = MC → quantity Qₘ.
• Price Pₘ taken from the demand curve at Qₘ.
• Competitive quantity Q_c where D intersects MC (P = MC).
• Shaded dead‑weight loss triangle between Qₘ and Q_c.

7.6.12 Exam Tips for Monopoly

1. Begin with a fully labelled diagram (D, MR, MC, P, Qₘ, Q_c, DWL).
2. State the profit‑maximising condition clearly: MR = MC.
3. Explain why Pₘ > MC indicates allocative inefficiency.
4. Discuss both allocative and productive inefficiencies when evaluating welfare.
5. When covering price discrimination, list the three degrees, required conditions, and give a real‑world example for each.
6. For natural monopoly questions, emphasise economies of scale, typical industries, and the main regulatory responses.
7. Link equity arguments to government intervention (price caps, public ownership).

7.7 Market Power & Pricing Strategies (Beyond Monopoly)

• Monopolistic competition – many firms, differentiated products, free entry → long‑run zero economic profit.
• Oligopoly – few large firms, interdependence; models: Cournot (quantity), Bertrand (price), kinked‑demand, game theory (pay‑off matrix, Nash equilibrium).
• Pricing objectives: profit maximisation, market‑share growth, revenue maximisation, sales maximisation, target return.

7.8 Firm Growth & Objectives

• Internal growth: reinvestment, research & development.
• External growth: mergers, acquisitions, strategic alliances.
• Objectives may differ between short‑run (profit) and long‑run (survival, market dominance).

3. A‑Level Government Microeconomics (Syllabus 8.1 – 8.3)

8.1 Market Failure – Government Intervention

• Externalities → taxes (negative) or subsidies (positive).
• Public goods → direct provision or financing through taxation.
• Information failure → regulation, standards, labelling.
• Market power → antitrust legislation, competition authorities.

8.2 Government Failure & Equity

• Administrative costs, regulatory capture, unintended consequences.
• Equity considerations: progressive taxation, means‑tested benefits, universal basic services.
• Trade‑off between efficiency (maximising total welfare) and equity (fair distribution).

8.3 Labour‑Market Intervention

• Minimum wage – raises income for low‑paid workers but may cause unemployment if set above equilibrium.
• Employment subsidies – encourage hiring of specific groups (youth, long‑term unemployed).
• Training programmes – increase human capital, shift LRAS right.
• Trade unions & collective bargaining – can raise wages above market level; may cause labour market rigidities.

4. A‑Level Government Macro‑Economics (Syllabus 9.1 – 9.4)

9.1 Economic Objectives & Circular Flow

• Primary macro objectives: sustainable economic growth, low unemployment, price stability, external balance, equitable income distribution.
• Circular flow model – households ↔ firms; government and foreign sector add injections (G, I, X) and leakages (T, S, M).

9.2 Aggregate Demand & Supply – Short‑Run & Long‑Run

• AD = C + I + G + (X‑M). Shifts: fiscal policy, monetary policy, changes in expectations, exchange rates.
• SRAS – upward sloping (price‑wage rigidity). LRAS – vertical at potential output.
• Inflationary gap (AD > LRAS) → upward pressure on prices; deflationary gap (AD < LRAS) → unemployment.

9.3 Fiscal Policy – Effectiveness & Limits

• Multiplier effect; crowding‑out (higher interest rates reduce private investment).
• Timing lags: recognition, decision, implementation, impact.
• Automatic stabilisers (taxes, benefits) smooth fluctuations without active policy changes.

9.4 Monetary Policy – Effectiveness & Limits

• Interest‑rate policy, open‑market operations, reserve requirements.
• Liquidity trap – when interest rates are near zero, monetary policy becomes ineffective.
• Transmission mechanisms and potential time lags.

5. A‑Level International Economics (Syllabus 11.1 – 11.6)

11.1 Balance of Payments (BOP)

• Current account (trade in goods & services, income, current transfers).
• Capital & financial accounts (direct investment, portfolio investment, other investment).
• Surplus → appreciation pressure; deficit → depreciation pressure.

11.2 Exchange‑Rate Regimes & Policies

• Floating, fixed, managed float, currency union.
• Policy tools: foreign‑exchange interventions, capital controls, macro‑prudent measures.
• Effects on competitiveness, inflation, and capital flows.

11.3 Development Indicators & Policies

Indicator	What it measures	Typical target (UN SDGs)
GDP per capita	Average economic output per person	Increase by 7 % per year in least‑developed countries.
Human Development Index (HDI)	Life expectancy, education, GNI	Raise HDI to “high” level.
Gini coefficient	Income inequality (0 = perfect equality, 1 = perfect inequality)	Reduce inequality.

• Development policies: foreign aid, debt relief, trade‑preferential schemes, technology transfer, investment in health & education.

11.4 Globalisation & Trade Policy

• Benefits: comparative advantage, larger markets, technology diffusion.
• Costs: terms‑of‑trade shocks, adjustment costs, environmental concerns.
• Trade policy instruments: tariffs, quotas, subsidies, voluntary export restraints, anti‑dumping duties.
• Regional trade agreements (EU, NAFTA, ASEAN) vs. multilateral (WTO).

11.5 Exchange‑Rate Movements & Their Impact

• Depreciation → makes exports cheaper, imports more expensive → improves trade balance but may raise inflation.
• Appreciation → opposite effects; can lead to current‑account deficits.
• Pass‑through: degree to which exchange‑rate changes affect domestic prices.

11.6 Current‑Account Policies & Capital Flows

• Policies to correct imbalances: exchange‑rate adjustment, fiscal tightening, import controls.
• Capital controls – limits on inflows/outflows to stabilise exchange rates and prevent asset‑price bubbles.
• Risks of sudden stops and capital flight; importance of credible macro‑policy framework.

6. General Exam Strategies

1. Read the question carefully – note the command words (e.g., “explain”, “evaluate”, “compare”).
2. Plan your answer: decide which diagram(s) and concepts are needed.
3. Start with a labelled diagram where appropriate; refer to it throughout the answer.
4. Use the “definition → mechanism → implication” structure for analytical points.
5. When evaluating, present at least two advantages and two disadvantages, and weigh them against the exam’s criteria (efficiency, equity, feasibility).
6. Conclude succinctly, summarising the main argument or stating the likely outcome.
7. Keep an eye on time – allocate roughly 8‑10 minutes per mark in a 2‑hour paper.