19 Monopoly Flashcards

1
Q

monopoly

A

situation in where there is a single seller in a market with no competitors

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2
Q

conditions of a monopoly

A
  • a single seller in a market
  • barriers to entry - cant compete in a monopoly market
  • barriers to exit - difficult to exit the market without making a loss
  • price maker - can choose the price in the market and is likely to choose a price higher than a competitive market
  • no close substitutes - nature means that it is difficult for customers to substitute the product for anything else
  • supernormal profit - in both short run and long run
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3
Q

dynamic efficiency

A

incentive to innovate products and processes to become productively efficient in the long run
- in perfectly competitive market there is little incentive to innovate because other firms can adopt the innovation quickly
- in a monopoly the barriers to keep new entrants out the firms can innovate and gain supernormal profits in the long run

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4
Q

X-inefficiency

A

lack of incentive to reduce costs
- under perfect competition every firm needs to keep its costs as low as possible to be able to sell at lowest possible price
- monopoly does not have this pressure and won’t look to keep costs as low as possible

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5
Q

advantages of a monopoly

A
  • can be dynamically efficient - more profit more innovation
  • gain economies of scale reducing average costs
  • may be able to compete internationally
  • supernormal profits can be reinvested creating more jobs and new products
  • potential of becoming a monopoly may incentivise a firm to be more successful
  • can avoid duplication of effort - inefficient to run two rail companies
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6
Q

disadvantages of a monopoly

A
  • high prices for consumers
  • X-inefficiency leading to higher average costs
  • less incentive to innovate due to a lack of competition
  • a monopoly can be so large that it suffers from diseconomies of scale
  • less choice for consumers
  • allocatively inefficient
  • productively inefficient
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7
Q

Natural monopoly

A

type of monopoly in which there are large economies of scale to be gained to the point where only one firm is viable
- long run marginal cost curve remains below the long run average cost curve

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8
Q

advantages and disadvantages of a natural monopoly

A

same as a monopoly
- advantage of economies of scale is so great that it may be logical for government to allow monopoly to exist
- government may need to step in and regulate the market

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