Monopoly

In this video I look at what is a monopoly? what characteristics does it have? Why might a firm want to be one? How does it do its pricing? What does a monopoly diagram look like? What efficiencies are associated with a monopoly? What are the costs and benefits to consumers? 

Also, there is a supporting booklet to the video attached below.

 

Monopoly by Komilla Chadha by Komilla Chadha

https://www.scribd.com/embeds/87027982/content?start_page=1&view_mode=scroll&access_key=key-i8czknkvzz67m61juls&show_recommendations=true

Advertisements

Chronology of An Idealised Property Cycle

This video explains the key features of a generic property cycle. It is a specific and interesting example of economics working in real life.

Equilibriums

The term equilibrium refers to the point at which demand = supply.

– It is believed that if you leave markets to their own devices, this will result in a market performing at an equilibrium level. This is based on the assumption that all other things are equal (Ceteris Paribus) such as that perfect competition exists in the market place.

– We can clearly see from any demand and supply diagram that if we operate at a price higher than the equilibrium price than this will result in excess supply. This is because if you look at the x-axis you can see that quantity supplied is greater than quantity demand. It is obvious from my other post that the reason for this is that as price increases less people are able  or willing to afford the good.

– Similarly, if a market operates at a price lower than that of the equilibrium price then this will result in excess demand. This is because again if we looked at a demand and supply diagram we can clearly see that the quantity demanded is greater than the quantity supplied. I can think of a great example to reflect this imbalance, when Topshop have a sale the price of their goods is reduced, the demand for sale products is great but the amount of goods that are available (the pretty ones that is) is very low. This results in people having their demand not met.

Important to note: That all movements along the curve are down to price changes. All shifts are down to non-price determinants such as weather, tastes, incomes, price of substitutes and complements etc.

Consumer Surplus

This is a short explanation of consumer surplus. I hope this helps make things simpler

In any given product there will be demand no matter what the price. I realise the magnitude of the demand may vary but the point is if, for example we are looking at the demand for exercise machines – whether the price is £400 or £4 there will always be someone ready to buy it (the amount of people who want to buy it will vary with the price).

We can see a similar situation in reality whether it is Primark or Harrods there is still a demand just the amount of it varies.

Now you must be wondering how does consumer surplus fit into this but it does. The market equilibrium for exercise machines may be £100 so the vast majority of supply will sell them for £100. If we imagine that all suppliers sold them for £100 then the consumers who were already ready to pay to pay over £100 will be gaining an advantage. It is almost like a profit they are making.

Subsequently, consumer surplus is defined as the value that consumers gain from consuming a good or service over and above the price paid.

We can see this clearly in a diagram:

The orange bit shows the consumer surplus – the consumers who are benefitting from the current market equilibrium price.

However, this is not all your need to know! You must know how to valuate consumer surplus. This is done through simple maths…calculating area of a triangle.

The formula for the area of a triangle is 0.5 X Base X height…

So in the diagram above the quantity OP1 is equal to the base which in this case is 100. The next bit is to identify the height and this is the difference between the market equilibrium price and the price where the demand is lowest. In this case it is the from £50 to £100 so the height is 50 (100-50).

The we multiply 50 by 100 by 0.5 and we get a consumer surplus of 2500.

That is how simple it is….

However, in exams the may frighten you by shifting the demand curve and saying what is the new consumer surplus. So remember the same principles apply you are looking at the price where there is demand is lowest and the new equilibrium price!

In economics consumers always just feel price changes.

What I have learnt when doing questions is that I miss read the questions so you have to be careful as to whether the question says what is the difference in the consumer surplus and what is the consumer surplus.

I hope this helps 🙂