12. monopoly Flashcards
assumptions of a monopoly
price maker
influences output
very high barriers to entry
abnormal profits in short and long run
may aim for profit maximisation (MR=MC)
pricing stategies to prevent competition (limit pricing)
generally inefficient
what are the types of monopolies
unique firm/pure monopoly - 100% market share
more than 25% - legal monopoly
more than 40% - dominant monopoly
natural monopoly - exists when having one firm in the market allows the market to be more productive efficient due to the large econoies of scale one firm can gain compared to multiple smaller firms
monopoly diagram?
abnormal (supernormal) profit diagram
5 benefits of a monopoly
- dynamic efficiency - profits can be reinvested
- economies of scale
- international competitiveness
- natural monopoly - more efficient to have one firm
- easier to regulate
3 drawbacks of a monopoly
- lack of competitiveness
- not productively or allocatively efficient
- price discrimination
what is price discrimination
a firm (normally a monopoly) charging different consumers different prices for the same product
pros and cons of price discrimination
pros:
increased revenue
cheap for some consumers
manages demand to avoid congestion
cons:
higher prices for some consumers
administration costs are incurred when varying costs
are monopolies allocatively efficient
neither in short or long run, due to being able to chare much more than the allocative efficient price level (AR=MC)
are monopolies productively efficient
neither in the short or long run, as they do not produce the greater output to acheive productive efficiency where AC=MC
if they decided to operate at the productively efficienct output they would have to lower prices to sell extra untits which would make MC higher that MR resulting in lower profits
are monopolies x efficient
no, as they have a low threat of competition so arent worries about lowering average costs, also they earn abnormal profits which will cover their average costs
are monopolies dynamically efficient
yes as they earn abnormal profits to reinvest
no beacuase they dont need to research and develop to lower the average costs over time
debatable
