Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In which market structure would firms typically earn 'super-normal profits'?

1. Perfect competition

2. Monopoly

3. Duopoly

4. Imperfect competition

The correct answer is: Monopoly

In a monopoly market structure, firms are characterized by their single control over the entire market for a particular good or service without any close substitutes. This unique position allows them to set prices above marginal cost, leading to the potential for earning 'super-normal profits.' Super-normal profits occur when a firm's total revenue exceeds its total costs, including both explicit and implicit costs. In a monopoly, the firm can restrict output to raise prices, maximizing profits without the pressure of competition that would typically drive prices down in other market structures. The lack of competition means that monopolists do not face competitive price reductions, allowing for sustained higher profit margins over time. In contrast, perfect competition tends to drive profits down to normal levels as numerous firms compete, while in imperfect competition, firms may have some degree of pricing power but are still subject to competitive pressures. In a duopoly, although firms can influence market prices, they face competition from one other, which can also limit the extent of super-normal profits. Thus, the monopoly structure stands out as the only market type where such profits can be consistently realized and maintained.