Monopolies, are they all bad?

The term monopoly carries many bad connotations, but are they all bad?

Next time you get a bus during the middle of the day in Dublin, be thankful for monopolies. Dublin Bus are a government sanctioned monopoly. Having the monopoly means no competition, which can be bad, but the Government can ensure that the monopolist provide certain services which the Government deem socially beneficial which include providing bus services on routes and at times which are non profit making. In general monopolies do not produce at the lowest point on their average cost curve and are not as efficient as they could be if they were in a competitive market.

How and why do monopolies exist?

There are a number of ways for monopolies to exist, each of the following types of monopoly have sufficient barriers to entry such that no firm can successfully enter the market and compete in a meaningful way.
We already saw Government sanctioned. The government provide one license to one company (Government run or not) to provide a service, they do not allow another service provider.

If a company have total control of a primary resource which is used in the production of a good, they can monopolize the market by being the sole producer. This is also true if a company hold a Patent or Copyright on a good or service, this is a legal document allowing no company to provide the same product or service, this is to protect a companies investment in research and development.

If a company is sufficiently large it can keep others out of the market due to Economies of Scale, as they can make it impossible to compete with them without a huge investment beyond the capability of any competing organisation. If a company has Technological Superiority or skills that are not possible to match or recreate, they can make it impossible to compete with them, in a similar way to the way Barcelona play football, many can try and copy their style but without players like Messi, Iniesta, Xavi and Fabregas, it is not possible to do it with the same success.

Can Monopolists charge what they want and sell as many as they like?

Monopolists can charge as much as they want or they can set the number of goods they will make available for sale, but they cannot do both. If a monopolists sets a price, then they hand control over to the market to decide how many items they will sell. The same is true when the monopolists sets the quantity available, they will sell this quantity at the price set by the market. 

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Advantages of Monopolies

• Monopolies can benefit from economies of scale and can sometimes produce at lower prices
• Single production can avoid duplication of resources. (No need for multiple factories)
• Employment can be more secure as the firm can deal with changes in demand as its earning Super Normal Profits.

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Disadvantages of Monopolies

• Monopolists normally do not produce at the lowest point of AC, so they are potentially wasteful.
• Monopolies earning S N P show that consumers are being exploited. 
• No choice of products/services. 
• Lazy suppliers, no incentive to be innovative as consumers have no choice. 
• Monopolists can sometimes be inefficient as they control price or quantity supplied.
• Monopolists can practice price discrimination and further exploit customers

Costs - The key relationship

Average Cost and Marginal Cost

These are two of the most commonly misunderstood terms by economics pupils. I believe the key to studying costs is understanding the relationship between average costs and marginal costs.


The average cost is calculated by dividing the Total Cost by the Quantity.
The marginal cost is the difference in the total cost for the addition of an extra unit.



We know that while MC < AC, the average cost is falling and when MC > AC, the average cost is rising. But whats important is understanding why...

Think of a footballer who scores two goals per game. His average is 2 and if he continues scoring two goals in every game, his marginal number of goals is also 2. However if goes and scores 4 goals in his next game (his marginal goals (4) is above his average (2) goals per game), so his overall average will rise. Likewise if he has a bad game and doesn't score (his marginal goals (0) is below his average(2) so his overall average will fall.

When we look at the graph, we see that MC curve cuts the AC curve at the lowest point on the AC curve. This is where AC is at its lowest, we said above once MC is > than AC, the average cost rises. This is the same with the curve, Once the MC curve goes above the AC curve, The AC curve starts to rise.

Price Discrimination

Price discrimination is a perfectly legal practice carried out by many sellers of goods, who wish to charge different customers different prices so as to increase their total revenue. In an ideal world for sellers, you could charge all of your customers the maximum price they are willing to pay.

There are days when I really want a bottle of Pepsi max, so much so that I would be willing to pay €5 for one. If Mr. Shopkeeper knew this, he would charge me €5 so as to get the maximum profit possible (replacing all consumer surplus with producer surplus) Fortunately for me and for most buyers, we don't tell the shopkeepers our maximum price we will pay, thus not allowing them to charge us it.

This clip from "Just go with it" shows the sellers (the little girl) producer surplus. She says that she would have done the job for the experience and no pay, so anything over that is producer surplus.
Adam Sandler shows his consumer surplus when he says that he would have paid $500 which is $200 more than the price they agreed.

In this situation the seller (the girl) has been able to exploit the buyer (Adam Sandler) as she knew that he was willing to pay more than her marginal cost which she set as "the experience".

For some sellers, selling large quantities of a good even at a reduced price is preferable to selling fewer goods at a higher price. This is where we will see buy one get one free or 3 for 2 promotions. This is another form of price discrimination where you discriminate against people who only buy one of something as compared to those who buy more than one at a reduced average price!!

When I go to the cinema now, I cost the cinema the same amount as I did when I was a student. I'm roughly the same weight, so I am not causing more wear and tear on the seats. Yet my tickets are about €2 (20%) more expensive!!!

Why? Because more students will go if its cheaper, and the price they pay is higher than the average cost for the cinema. So everybody wins except me who is paying more than student me!

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Definition : Price Discrimination is the selling ofthe same good (or service) to different customers at different prices, where such pricedifferences are not caused by differences in cost.

Forms of Price Discrimination

1st degree - Selling goods to each individualconsumer at the maximum price they will pay for it.

• replacing all consumer surplus with producer surplus.

2nd degree - Sale of different quantities of agood to same consumer at different prices.

• Buy 2 get one free (reducing averageprice)
• Hotel, €60 per night, stay two nightsfor €99

3rd degree - Sale of identical goods to differentcustomers at different prices.

• Student tickets
• Industrial users versus residential users (sky tv)

Can any seller price discriminate?

No, Certain conditions are necessary for PriceDiscrimination

They include 

• Element of Monopoly Power.
• Distinct and separate markets. (Noreselling between markets)
• Different elasticities of demand.
• Consumers lack of knowledge(ignorance)
• Consumer indifference

Taxes? Why are they important?

Not many people like paying taxes or believe they should be taxed... You would have a tough job finding somebody who would like to pay more tax and give up more of their hard earned money.

What would happen if nobody paid tax?

we would have no roads, no hospitals, no schools, no social welfare.The rich would be richer and the poor would be broke and not broke like many people are at the moment but completely penniless.

What are the functions of tax?

• To raise money for Government Expenditure
• To redistribute wealth
• To achieve desirable social objectives
• To provide merit goods
• To provide public goods

Taxation can also be used as an automatic stabilizer.

So we all agree that we need to Tax.... But how best to tax?

Adam Smith set down four canons of taxation in The Wealth of Nations. These canons or laws are still hugely relevant to tax today. He said that all taxes should be

• Equitable (Taxes should be fair, and tax the people who can afford it)
• Economical (Raise more money than it costs to collect)
• Convenient (It should be easy for the taxpayer to pay the tax)
• Certainty  (People should be aware of their tax liability in advance)

These canons lay the foundations of a good tax system and when applied with some new canons can best describe how most countries try to implement their tax systems. 

A good tax system should not act as a disincentive to work, invest or save. If taxes on low income earners are high and people have access to relatively high social welfare payments, it may not be worth their while to bother working which can cause a major issue for the Government.

***Exam Tip***

I believe that you can answer any question on evaluating a tax by applying Adam Smiths four canons along with the disincentive canon.

Think 

Is the tax fair? Can the people being asked to pay it, afford it?

Are the Government making a profit on collecting the tax?

Is it easy or handy to pay?

Does the tax payer know how much they are expected (liable) to pay? 

and could the tax act make people not carry out the activity and therefore reduce productivity in the economy?

Why Blog? Leaving Cert Economics

Why Blog??

When I sat the leaving certificate there were not many blogs, The only way to learn was to sit in the classroom and try to soak up and remember what your teacher told you. It was hard to read around a topic or find ways to understand something that you didn't get from the way your teacher told you. Yes there were books and journal articles, but these were technically written, too often aimed at university students or professionals working in these fields. In a world of smart phones, no question goes unanswered, young people of today are programmed to search online, There is a wide range of advice and information available online (not always correct), I am hoping that pupils will find this a helpful resource and I can make studying these subjects more enjoyable.

I am looking to write about complex topics studied in Geography and Economics in a way that the 17 year old me could have related to. The best teachers I know teach using simple English and use examples close to home for the pupils. When studying market structures in Economics, I like to use our class room or the school catering facilities or tuck shop as examples and see how we can relate them to the topic. I have found that this closeness and small scale examples help pupils remember the concepts and allow these to be applied on a grander scale later on.