Monopoly – IB Economics Guide

Monopoly - IB Economics Guide

Monopolies are one of the most recognisable market structures in economics, and in the IB syllabus, they’re essential for understanding the extremes of market power. This guide will walk you through the key features of monopolies, relevant IB diagrams, real-life examples, and exam tips.

What is a Monopoly? [AO1] Start here

A monopoly is a market structure where one firm dominates the entire market, often defined as having over 25% market share in a given industry. In its purest form, a monopoly is the sole seller, with no close substitutes and high barriers to entry.

Market Power Part 3: Monopoly – The One-Firm Show

What happens when one firm runs the market? Explore monopoly and natural monopoly with real-life examples in this IB Economics HL Market Power series post.

IB Economics monopoly | Natural monopoly examples | Monopoly market power | Profit maximisation HL

Market Power Part 5: Measuring Market Power and the Monopolistic Middle Ground

What happens between monopoly and perfect competition? Meet monopolistic competition, market concentration ratios, and the pros and cons of big firms in IB HL Economics.

IB Economics monopolistic competition | Measuring market concentration | Advantages of large firms | Government regulation monopoly

Key Characteristics:

• Single seller

• Price maker

• Barriers to entry (legal, technological, or economic)

• Imperfect information

• Abnormal (supernormal) profits in the long run

IB Tip: Always refer back to these features when answering definition or short-answer questions. Command terms like “explain” and “distinguish” often test these.

Monopoly Diagram Explained [AO2]

The standard monopoly diagram includes:

• Downward-sloping AR (Demand) and MR curves

• Profit maximisation at MC = MR

• Price set above marginal cost (P > MC)

• Abnormal profits shown as the shaded area between ATC and price at output Q

HL students should be able to derive the MR curve and understand why it lies below the AR curve.

Real-World Monopoly Examples [AO2 / AO3]

Natural Monopolies:

• National Grid (UK) - Electricity transmission

• Thames Water - Regional water suppliers

Legal Monopolies:

• Patents (Pharmaceuticals e.g. Pfizer’s COVID-19 vaccine)

• Copyrights (Disney's media content)

Digital Monopolies (Debatable):

• Google - Search engines

• Microsoft - Operating systems (historically)

IB Evaluation: Distinguish between “pure” monopolies and firms with monopoly power. The IB wants nuanced thinking.

Efficiency, Welfare, and Regulation [AO3 / AO4]

Monopolies are often productively and allocatively inefficient, meaning:

• Allocative inefficiency: P > MC, underproduction from society’s point of view

• Productive inefficiency: Not producing at the lowest point of ATC

• Consumer choice reduced

• X-inefficiency: Less incentive to reduce costs due to lack of competition

But monopolies can also be beneficial:

• Economies of scale → Lower costs in the long run

• Funding for R&D and innovation

• Natural monopolies prevent duplication of infrastructure

Use welfare loss diagrams and talk about dynamic efficiency in long-run innovation.

Evaluation Strategies for IB Exams [AO4]

When evaluating monopolies, consider:

• Time period (short vs long run)

• Market type (natural vs legal vs strategic)

• Regulation policies (e.g., price capping, subsidies)

• Alternative market outcomes (would perfect competition be better?)

IB Evaluation Phrases to Practise:

• "It depends on..."

• "In the short run, however..."

• "While this may be true, in theory..."

• "A counterargument would be..."

Quick Summary: Monopoly in IB Economics

• Feature: Monopoly

• Number of firms: One

• Price setting power: High

• Barriers to entry Very high

• Efficiency: Often inefficient

• Examples: Google, Water Supply, Pfizer

• Diagrams needed?✅ Yes

Frequently Asked Questions

Q: Is monopoly always bad for consumers?
A: Not necessarily. While prices are higher, monopolies may reinvest profits into innovation or benefit from economies of scale.

Q: Do I need to learn and know the Monopoly diagrams?
A: Yes. It’s essential, students should also explain why MR lies below AR.

For access to all key diagrams, model answers, and exam strategies,

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