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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix


Monopoly


When there is only one supplier in a market it means that a ‘monopoly’ exists.  The business in a monopoly will have the highest degree of market power and will be able to be a ‘price maker’, with maximum control over price and quantities in the market.  Monopolies will most often exist in markets where the establishment costs for a business are very high, requiring large scale production to justify investment. This acts as a barrier to the entry for new suppliers and enables the monopolist supplier to control the market.  


Industries such as mining and petroleum would naturally tend towards a monopoly market if it were not for government restrictions via the Australian Competition and Consumer Commission.  Other industries, like the domestic postal service, have characteristics that make them a ‘natural monopoly’.  In the case of Australia Post, this means that it makes economic sense for only one producer to supply the infrastructure necessary to provide postal services across the whole of Australia.  To do otherwise (e.g. have two or more producers) would result in significant duplication, higher per unit costs and higher prices for consumers.  In recognition of the benefits to be gained from having just one operator, the government has provided Australia Post with a legislated monopoly in the market for standard letters.  The government also maintains control over the prices charged by Australia Post to ensure that it is not earning ‘super normal’ profits at the expense of consumers. Australia Post is also a Government Business Enterprise (owned by the Federal Government), which means that profits are retained as part of government revenue and can be spent on provision of goods or services by the Federal Government.


In oligopolies and monopolies, suppliers are able to earn supernormal profits over time.  This is because they will have sufficient market power to prevent the entry of new suppliers to the market and/or mislead or deceive consumers about the value of products.  This leads to an inefficient allocation of the nation’s resources and is a major reason for the existence of laws and regulations designed to eliminate anti-competitive behaviour in the economy (see market failures).

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Click here to watch a 60 Minutes piece on market concentration in the eye wear market and the implications for consumers