AQA A-level Economics: Monopoly, monopoly power and price discrimination (7136) – Revision Notes

These notes condense the Monopoly and monopoly power and Price discrimination sub-sections of the AQA A-level Economics specification (7136, version 1.3, 29 June 2022), numbered 3.1.5 on the AQA website. The study guide has the full explanations and worked examples. Test yourself with the practice questions. All numbers are invented. See also the AQA A-level Economics hub, the printable checklist and the free 10-minute diagnostics.

Key definitions

Term	Meaning
Pure monopoly	A single seller facing the whole market demand curve
Price maker	A firm that chooses its price because its demand curve slopes down
Monopoly power	The ability to hold price above marginal cost; a matter of degree
Barrier to entry	A cost or rule that blocks or discourages new firms from entering
Supernormal profit	Profit above the minimum needed to keep the firm in the market (price above AC)
Price discrimination	Charging different prices for the same product where the difference is not due to cost
Natural monopoly	A market where one firm’s average cost falls over the whole range of demand

The monopoly diagram: method

1. Draw downward-sloping AR (demand). Draw MR below it, twice as steep if demand is a straight line.
2. Draw MC (and AC). Mark output where MR = MC.
3. Go up to AR to read price. Go to AC to read average cost.
4. Supernormal profit = (price − AC) × output.
5. Label each axis and curve, and name the equilibrium output and price.

Key facts:

• MR = 0 at the output where total revenue is highest and PED = 1.
• Profit-maximising output is always on the elastic part of demand.
• A linear demand curve P = a − bQ gives MR = a − 2bQ.

Worked reminder (illustrative)

Demand P = 80 − 4Q, so MR = 80 − 8Q. MC = £16, fixed costs £100.

• 80 − 8Q = 16, so Q = 8; P = 80 − 32 = £48.
• AC = 16 + 100/8 = £28.50; profit = (48 − 28.50) × 8 = £156.
• PED = (1/4)(48/8) = 1.5 (elastic, as expected).

Second worked reminder: revenue and elasticity (illustrative)

Demand P = 96 − 6Q, so MR = 96 − 12Q.

Q	P (£)	TR (£)	MR between rows (£)
2	84	168
4	72	288	60
6	60	360	36
8	48	384	12
10	36	360	−12

• TR rises while MR is positive and peaks at Q = 8 (MR = 0, PED = 1). Beyond that, MR is negative.
• With MC = £24, MR = MC gives 96 − 12Q = 24, so Q = 6 and P = £60.
• PED at Q = 6 is (1/6)(60/6) = 1.67, so demand is elastic where the monopolist operates.
• Quick test: if the stated MR at an output is below MC, cut output; if above, expand.

Factors influencing monopoly power

Factor	Effect on power
Barriers to entry (legal, scale economies, sunk costs, control of inputs, brands)	Stop rivals entering, so supernormal profit lasts
Number of competitors	Fewer rivals mean fewer substitutes and less elastic demand
Advertising	Builds loyalty and lowers elasticity; can be a sunk-cost barrier
Product differentiation	Fewer close substitutes and a steeper demand curve

Chain of reasoning for a barrier (use in 4-6 mark answers): high sunk costs → rivals fear unrecoverable losses → no entry → the firm keeps its market share and its supernormal profit → it can hold price above marginal cost.

Chain for differentiation: distinctive product → few close substitutes → less elastic demand → a price rise loses fewer sales → larger mark-up.

Price makers in monopolistic competition and oligopoly

• Both face downward-sloping demand, so both choose price using MR = MC.
• The degree of power differs: close substitutes (many rivals) or rivals’ reactions (few rivals) limit the mark-up.
• Rule: the more elastic the demand, the smaller the gap between price and MC.

Worked reminder: two price makers (illustrative)

Both firms have MC = £6. Firm S faces P = 30 − 2Q (MR = 30 − 4Q); Firm T faces P = 18 − Q (MR = 18 − 2Q).

• S: 30 − 4Q = 6, Q = 6, price = £18, mark-up £12 (66.7% of price), PED = (1/2)(18/6) = 1.5.
• T: 18 − 2Q = 6, Q = 6, price = £12, mark-up £6 (50% of price), PED = (1)(12/6) = 2.0.
• Firm S has more monopoly power because its demand is less elastic.
• Oligopolists and monopolistic competitors are price makers, but rivals limit how high the mark-up can go.

Monopoly: advantages and disadvantages

Disadvantages	Advantages
Higher price, lower output than a competitive market with the same costs	Economies of scale can lower costs enough to beat the competitive price
Price above MC (allocative inefficiency)	Supernormal profit can fund research and investment (dynamic efficiency)
Possible X-inefficiency	Natural monopoly avoids wasteful duplication
Income moves from consumers to owners	Patent reward encourages invention
Less choice or slower improvement	Scale may help international competitiveness

Cost-saving test (illustrative). With demand P = 50 − 2Q and a competitive MC of £30, competition gives P = £30. The monopoly price is (50 + MC)/2, so it only matches £30 if the monopolist’s MC is £10. Above that MC, consumers pay more.

Evaluation hooks: size of the cost saving; reinvestment of profit; contestability; regulation; whether the product is a necessity.

Writing an evaluation of monopoly: state a gain and a loss, then say what decides between them: the size of the cost saving, whether profit is reinvested, how easy entry is, and whether regulation limits price.

Price discrimination

Four conditions: price-setting power; separable markets; different PEDs; no resale.

Two-market rule: produce in each market where MR = MC. Charge the higher price where demand is less elastic.

Method:

1. Find MR in each market.
2. Set each MR equal to MC to get output in each.
3. Read each price from that market’s demand curve.
4. Add profits, then compare with a single price if asked.

Worked reminder (illustrative)

MC = £10. Market X: P = 70 − 2Q, MR = 70 − 4Q. Market Y: P = 40 − Q, MR = 40 − 2Q.

• X: 70 − 4Q = 10, Q = 15, P = £40. PED = (1/2)(40/15) = 1.33.
• Y: 40 − 2Q = 10, Q = 15, P = £25. PED = 25/15 = 1.67.
• Profit = 30 × 15 + 15 × 15 = £450 + £225 = £675.

Perfect price discrimination: each customer pays their own maximum; output rises to where P = MC; consumer surplus is zero; the firm takes all the gain.

	Producers	Consumers
Gains	Higher profit; spare capacity filled	Lower price for the elastic group; access for low-income groups; more output in some cases
Losses	Cost of separating markets, stopping resale	Higher price for the inelastic group; less consumer surplus; fairness concerns

Real-world examples: peak and off-peak travel, student and child discounts, booking-date airfares, cinema matinees.

Must-know distinctions

• Price maker vs monopolist: all monopolists are price makers, but price makers are not all monopolists.
• Price discrimination vs cost differences: a premium for a cost-related reason is not price discrimination.
• Supernormal profit vs profit per unit: multiply by output.

Quick self-test

1. State the condition for profit maximisation for a monopolist.
2. For P = 90 − 6Q, write the MR function.
3. At Q = 5 with P = 60 − 4Q, what are P and MR?
4. A monopolist faces demand P = 80 − 4Q and MC = £16. Find output and price.
5. Find PED at that point.
6. List the four conditions for price discrimination.
7. Which market is charged more: elasticity 1.2 or 2.5?
8. Give one advantage and one disadvantage of monopoly.
9. Why would a monopolist never produce where MR is negative?
10. Perfect price discrimination: demand P = 70 − 5Q, MC = £20. Find output and profit (no fixed cost).
11. Why must resale be prevented?

Answers

1. MR = MC.
2. MR = 90 − 12Q.
3. P = 60 − 20 = £40; MR = 60 − 40 = £20 (with MR = 60 − 8Q).
4. 80 − 8Q = 16, Q = 8, P = £48.
5. PED = (1/4)(48/8) = 1.5.
6. Price-setting power; separable markets; different PEDs; no resale.
7. The market with elasticity 1.2.
8. Advantage: economies of scale or funds for research. Disadvantage: higher price and lower output than competition.
9. A rise in output would lower revenue and raise cost, so profit falls.
10. Q = (70 − 20)/5 = 10. Revenue = (70 + 20)/2 × 10 = 450. Cost = 200. Profit = £250.
11. Low-price buyers would sell to high-price buyers, undercutting the firm and removing the price difference.

Where marks are usually lost

• Taking the monopoly price off the MR curve when it belongs on the AR curve.
• Using MR = AR for a monopolist.
• Writing “high barriers to entry” without linking them to lasting supernormal profit.
• Describing monopoly purely as bad, with no evaluation.
• Citing the discrimination conditions in a list without applying them to the scenario.
• Saying price discrimination always raises output.
• Confusing a cost-based price difference with price discrimination.
• Omitting units and the word “per” when quoting prices and profits.

Official syllabus

AQA AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, published by AQA. Sections used: Monopoly and monopoly power, and Price discrimination.