What this lesson teaches
I can describe monopoly markets and explain how one firm affects price, quality, choice and profit.
Syllabus K343, 3.7.2. Monopoly markets: characteristics, advantages and disadvantages of monopoly markets; effect of having only one firm on price, quality, choice, profit
Make a guess
A drug company holds a patent on a new medicine. If it raises its price, will it sell the same amount?
- No. It sells nothing, because patients switch to rivals.
- Yes. A monopoly can charge any price and sell the same.
- No. It sells less, because demand still slopes down.
Show the answer
No. It sells less, because demand still slopes down.
A monopoly sets its price but cannot force people to buy. At a higher price, some patients or health systems buy less.
A monopoly is a single seller protected by barriers to entry; it can charge higher prices but may fund research.
A monopoly is a market with a single seller. There are no close substitutes for its product, and barriers to entry stop new firms joining.
Barriers to entry include legal rights such as patents and licences. Others are huge economies of scale that new firms cannot match, and control of a key resource. In practice, a firm with a very large market share can act like a monopoly.
Effects of one firm. Price: it can restrict supply and charge higher prices. Choice: consumers have only one seller. Quality: without rivals, it may have little pressure to improve. Profit: barriers protect high profits in the long run.
Advantages: large economies of scale can mean lower costs. High profits can fund research into new products, which is why patents give inventors a temporary monopoly. Some monopolies, such as water supply, avoid wasteful duplication of pipes. Diagrams are not required here.
- Monopoly
- Single seller, no close substitutes, barriers to entry.
- Barriers to entry
- Patents and licences, economies of scale, control of resources.
- Effects
- Higher price, less choice, possible complacency, high profit; may fund research.
Worked example: A medicine patent
A drug company invents a new medicine and receives a 20-year patent.
- Barrier: the patent is a legal barrier, so no rival can copy the drug.
- Price: the company can charge a high price, since patients have no substitute.
- Advantage: the profit rewards years of costly research and funds future medicines.
- Disadvantage: some patients and health systems struggle to afford the drug until the patent ends.
Watch out for this
A monopoly can charge any price it likes and still sell the same amount.
A monopoly still faces the demand curve. If it raises the price, quantity demanded falls. It chooses a high price but sells less.
Check your understanding
Which is an advantage that a monopoly may bring to consumers?
- It faces strong pressure from rivals to cut prices.
- Consumers have more choice of sellers for the same product.
- Profits may fund research into new and better products.
Show the answer
Profits may fund research into new and better products.
Right. Protected profits can pay for long-term research.
Check your understanding
Which is a barrier to entry that can protect a monopoly?
- Low costs of starting a business
- A patent on the product's design
- Technology that anyone can use for free
- Many small rival firms in the market
Show the answer
A patent on the product's design
Right. A patent stops other firms copying the product for many years.