Chapter 23 IGCSE ECONomics notes in detail.pdf

IGCSE Economics 0455 Economics notes in detail

1. Tab 1

2. A competitive market is characterized by many buyers and sellers, easy entry and exit,
and products that are
perfect substitutes, leading to firms being price takers and facing
strong incentives to be efficient and responsive to consumer preferences.
Features of Competitive Markets
●​Large Number of Buyers and Sellers: No single firm or consumer can influence
prices, so firms are price takers. For example, in agricultural markets like wheat
or rice, individual farmers have little control over the global price.
●​Homogeneous Products: Goods are similar or identical, making it easy for
consumers to switch between suppliers. For example, basic vegetables in local
markets or certain financial assets like foreign currency.
●​Free Entry and Exit: Firms can enter when there are profits and exit when losses
occur, ensuring profits tend toward a normal level over time. New bakeries or
food stalls opening up or closing down exemplify this.
●​Perfect Information: Buyers and sellers are aware of prices and product quality,
increasing transparency and keeping prices in check.
●​Price Takers: Since no firm has market power, they must accept the market price
instead of setting their own.
Behaviour and Performance of Competitive Firms
●​Price Setting: Firms cannot set prices above the market level, or they risk losing
customers. If a tomato seller in a market charges more than others for identical
tomatoes, buyers will simply go elsewhere.
●​Cost Efficiency: Firms must constantly look to reduce costs and be innovative to
survive, as inefficient firms will be driven out. For instance, a grocery store
offering lower prices due to better supply chain management will outcompete
less efficient stores. ●​Response to Demand: Firms in competitive markets respond quickly to changes
in demand. If consumer tastes shift towards organic produce, more sellers will
stock them rapidly.
Entry, Exit, and Profit Dynamics
●​Normal Profit in the Long Run: When firms make more than normal profit
(supernormal profit), new firms enter, increasing supply and lowering prices until
only normal profit remains. Conversely, losses drive firms out, reducing supply
and restoring normal profits.

3. ●​Short Run vs. Long Run: In the short run, profits or losses occur due to demand
shifts but are temporary. For example, if a sudden health fad boosts demand for
quinoa, existing sellers make supernormal profits until more suppliers enter the
market and prices fall.
Real-World Examples
Market Structure Example Key Features [Citations in cells]
Perfect
Competition
Agricultural produce markets Many buyers/sellers, identical products
Foreign exchange Transparent pricing, ease of entry/exit
E-commerce
platforms
Price comparison of
electronics
Quick switching by consumers, no price
control
Local bakeries Competition in bread sales Quick entry/exit, price-driven competition
Illustrative Example
●​Consider vegetable sellers in a wholesale market where all tomatoes are virtually
identical. If one seller charges higher than others, buyers switch instantly. If
demand rises and sellers make extra profits, more sellers enter, increasing supply
and driving prices back to normal. If demand falls, some sellers make losses and
leave, reducing supply and raising prices to normal levels again.
Efficiency and Consumer Welfare
Competitive markets drive efficiency because:

4. ●​Firms must minimize costs and respond to preferences or lose customers.
●​Consumer welfare is maximized as prices are kept low and resources are
allocated to where they are most valued.
However, small firm size may mean they cannot achieve all the cost savings from
large-scale production (economies of scale), so prices may not be as low as
theoretically possible.
In summary, competitive markets foster consumer choice, efficiency, and price
discipline, but may have limits if economies of scale are significant. Real-world
examples include agricultural goods, currency trading, and some segments of online
retailing

5. Tab 2

6. Monopoly markets ​
The usual meaning of a monopoly is a sole supplier of a product having 100% share of
the market. This is often referred to as a pure monopoly and we will concentrate on this
definition. Some governments define a monopoly as a firm that has 25% or more share
of the market, and a dominant monopoly when a firm has a 40% share of the market.

A monopoly market exists when a single firm is the sole supplier of a product with no
close substitutes, possessing significant control over pricing, output, and market
conditions due to high barriers to entry and exit.
Key Characteristics of Monopoly
●​Single Seller: The monopolist is the industry itself, supplying 100% of the market
demand. For example, Indian Railways is the only nationwide provider of certain
long-distance passenger routes.
●​Price Maker: A monopoly can set prices as desired, adjusting output to influence
market prices rather than taking the price as given, as in competitive markets.
Microsoft historically had this power in the PC operating system market.
●​High Barriers to Entry: Entry into monopoly markets is restricted by legal,
technological, economic, or strategic barriers. De Beers' long-time dominance in
the diamond market was based on controlling physical resources and strong
brand power. ●​Lack of Substitutes: The monopolist’s product is unique, with no close
substitutes available—for example, patented pharmaceuticals or a utility
company supplying water in a specific city.
●​Profit Maximization: Monopolists can often earn and sustain supernormal
(abnormal) profits due to entry barriers and lack of competition.
How Monopolies Arise
●​Superior Efficiency and Strategy: A firm may outcompete rivals through lower
costs or better innovation, steadily acquiring full market control.
●​Example: A dominant logistics company that outperforms rivals by
consistently providing faster, cheaper delivery may eventually become a
monopoly if competitors exit.
●​Mergers and Takeovers: Acquiring or merging with all competitors can leave one
firm as the sole supplier, such as large telecom or media mergers that lead to
monopolistic power in some regions.

7. ●​Legal Privileges: Patents, government licenses, and copyrights can exclude
competition. Pharmaceutical companies often have temporary monopolies on
new drugs.
●​Example: Bharat Biotech’s patent on Covaxin provided monopolistic rights
for a period in the Indian vaccine market.
●​Resource Ownership: Control of key resources, such as diamond mines (De
Beers), oil reserves, or specialized technology, creates monopolies.
●​Government Grants: Some monopolies are established or maintained by
government decision, like public utilities or postal services.
Why Monopolies Persist
Barriers to Entry & Exit
●​Economies of Scale: Large-scale production by the monopolist results in lower
unit costs, deterring potential entrants who cannot match efficiency or require
large initial investments. Utility companies (water, electricity) often operate as
natural monopolies. ●​Sunk Costs: High unrecoverable costs (brand-building, customized equipment)
discourage entry and make exit costly, trapping or deterring new competition.
●​Legal Barriers: Patents, long-term contracts, and exclusive government licenses
prevent new competition, such as pharmaceutical patents or broadcast licenses.
●​Brand Loyalty: Extensive advertising and established customer trust (e.g.,
Coca-Cola) make it hard for new products to gain market share.
●​Vertical Integration: Monopoly firms can control supply chains and distribution,
making it difficult for rivals to access necessary inputs or retail channels—for
example, big oil companies controlling both extraction and retail.
Examples of Monopolies
Monopoly Type Example Key Barrier/Reason
Pure Monopoly De Beers (diamonds) Resource control

8. Government
Monopoly
Indian Railways, local water utility Legal, infrastructure
Technological
Bharat Biotech (Covaxin patent in
India)
Patent, technology
Historical
Microsoft Windows OS (PC
operating systems)
Scale, intellectual
property
Impact and Dynamics
A monopoly can produce higher prices and lower output compared to competitive
markets, potentially reducing consumer welfare. However, monopolists may also invest
more in research (as with patents) and infrastructure when large-scale investment is
required. High barriers to entry and exit, strong control over supply or technology, and
legal advantages help ensure the persistence of monopoly power.
In summary, monopoly markets are defined by a single dominant seller, substantial
entry barriers, and price-making ability, with real-world examples rooted in resource
control, patents, legal protection, and economies of scale.

9. Tab 3

10. Monopolies continue to exist mainly because of barriers to entry and exit that make it
difficult for new firms to enter the industry and compete. These barriers may be legal,
financial, technological, or strategic, which help the monopoly maintain its dominance
and ability to earn supernormal profits in the long run. Let’s break this down in detail.
Why Do Monopolies Continue?
1.​Barriers to Entry​
These prevent new firms from entering the market and challenging the monopoly.
●​Legal barriers:​
Patents, copyrights, trademarks, and government licenses legally protect
monopolies from competition.​
Example: Pharmaceutical companies often hold patents for new drugs,
preventing others from producing the same medicine for a number of
years.
●​Economies of scale:​
A monopoly that produces on a large scale can achieve lower unit costs,
which makes it extremely competitive against small or new entrants.​
Example: Electricity companies operate most efficiently as large-scale
producers since they can spread fixed costs like infrastructure over many
customers.
●​High capital requirements:​
Some industries require huge initial investments in equipment, plants, or
technology that deter new entrants.​
Example: Setting up a new steel plant or telecommunications network
requires billions of dollars, discouraging fresh competition.
●​Brand loyalty and advertising:​
Established monopolies often spend heavily on advertising to create
strong consumer loyalty, making it difficult for newcomers to attract
customers.​
Example: Coca-Cola has such a strong branding effect that even with
alternatives available, many consumers remain loyal to Coke.
●​Control of key resources:​
A monopoly may own or control essential raw materials or distribution
channels.​
Example: In the early 20th century, De Beers controlled most of the world’s
diamond mines, giving it monopoly power over diamond supply.

11. ●​Exclusive access to outlets:​
A monopoly may tie up contracts with major retailers, leaving no space for
rivals to access the market.
2.​Barriers to Exit​
High exit costs may discourage potential entrants, because if they fail, their
losses could be unrecoverable.
●​Sunk costs:​
These are costs that cannot be recovered if the firm exits the market, such
as advertising expenses or industry-specific equipment.​
Example: A firm investing heavily in specialized oil drilling rigs may be
unable to recover costs if it fails in the industry.
●​Long-term contracts:​
Some monopolies may lock in consumers or suppliers with long-term
commitments.​
Example: Energy suppliers may have fixed multi-year contracts with
customers, reducing the chance of a competitor entering and gaining
market share.
The Behaviour of a Monopoly
●​Price vs. output decision:​
A monopoly can either set the price and accept the resulting demand, or choose
a quantity to produce and let the market determine the price.​
Example: If a monopoly charges a high price for cable TV, demand might fall. If
instead it decides to sell to a maximum number of households, it must reduce
the price.
●​Earning supernormal profits:​
Due to lack of competition, monopolies can sustain profits in the long run, unlike
competitive markets where new entrants drive profits down to normal levels.

Performance of Monopolies: Criticism vs. Benefits
1.​Criticism
●​They may restrict supply and push up prices.​
Example: A single supplier of bottled water in an isolated town could sell
at very high prices.

12. ●​They may produce poor quality goods or fail to innovate.​
Example: State-controlled telephone services in many countries (before
liberalization) were slow, inefficient, and offered limited services because
consumers had no alternatives. 2.​Possible Benefits
●​Economies of scale: Lower average costs can lead to lower prices for
consumers.​
Example: Railway networks are considered “natural monopolies” because
having multiple competing track systems would be wasteful and
inefficient.
●​Research and Development (R&D): Supernormal profits can fund
innovation.​
Example: Large tech firms with monopoly-like positions (e.g., Microsoft in
the 1990s, or Google today) have invested significantly in new products
and technologies.
●​Avoidance of duplication: In certain industries, duplication of
infrastructure is costly and inefficient.​
Example: It does not make sense to have multiple parallel electricity grids
or water pipelines managed by different firms in the same city.

Occurrence of Monopolies
Monopolies can be defined differently depending on how narrowly we define the market:
●​National level monopoly:​
A country may have only one supplier for natural gas, such as Gazprom in Russia.
●​Industry-specific monopoly:​
In aviation manufacturing, Boeing and Airbus dominate, giving them significant
monopoly or duopoly characteristics.
●​Local monopoly:​
A small town might have only one supermarket, petrol station, or water supplier.
Even though competition may exist at regional or national levels, the town itself
effectively has a monopoly.
Conclusion

13. Monopolies continue to exist because barriers to entry and exit shield them from
competition, allowing them to earn sustained profits and control market outcomes.
While monopolies are often criticized for inefficiency, higher prices, and lack of
innovation, they may sometimes be justified due to economies of scale, essential
service provision, or the ability to fund research and development. Ultimately, whether
consumers benefit or suffer from monopolies depends on the industry, the extent of
regulation, and how the monopoly behaves.