25marker on monopolies

Question 1

Intro

Answer 1

MP = market structure where one firm is the sole supplier of a good. Legal 25%, pure 100%. MP firms can use MP power to set prices and benefit from SNL prof, prof above normal prof by operating where MC = MR as they are profit maximisers.

Question 2

Benefit to consumers

Answer 2

Can benefit from HQ goods/services. MP firms have highly differentiated goods normally protected by patents and can make and sustain short/long term supernormal profits by operating at point D where MC = MR. Can reinvest SNL profits at area ABCD into R + D and make the production process more efficient. Consumers benefit from better value for money (ceteris paribum) and increased welfare.

Question 3

Evaluation of benefit to consumers

Answer 3

MP firms have a high degree of price setting power and little to no competition as a result of high barriers to entry. They have no incentive to reinvest into research and development so dynamic efficiency in this situation would be deemed irrational. More likely that increased profits result in increased £ for shareholders.

Question 4

Benefit to firms

Answer 4

Can benefit from economies of scale. Increases in output lower average production costs. Examples of EOS’ are managerial, financial and technical. As MP firms exhaust EOS’, they become more productively efficient, minimum factor inputs generate maximum output. MP firms can also operate on the MES, which serves a significant barrier to entry for new firms, allowing MP firms to sustain supernormal profits in the long run.

Question 5

Evaluation of benefit to firms

Answer 5

MP firms do not need to compete to survive and therefore have no incentive to be productively efficient or cut costs. Reality is MP firms are likely to be X inefficient and suffer from organisational slack as a result of their inability to control costs. High costs act as a barrier to entry for new firms.

Question 6

Benefit to economy

Answer 6

In cases like the NHS and state education in the UK, monopoly firms are able to aid in the provision of a public good. Through large scale operation, MP firms are able to benefit from economies of scale and cut production costs, making it more affordable for society to have access to public goods with positive externalities in consumption.
Allocative efficiency is achieved by operating where MC = AR, and at this point, deadweight loss is eliminated, improving the welfare of society.

Question 7

Evaluation of benefit to the economy

Answer 7

Due to lack of competition, consumers have no choice but to buy what is produced at the price set by the MP firm, which pursues profit maximisation. Leads to a conflict of interest between profit maximisation and allocative efficiency.

Question 8

Conclusion

Answer 8

MP firms have many benefits to consumers, firms and the economy but the extent to which they benefit these economic agents is dependent on whether they are privately or publicly owned. Privately owned MP firms pursue prof maximisation while publicly owned MP firms pursue welfare maximisation. In the short run, MP firms will tend to benefit all agents but in the long run they are likely to exploit consumers and abuse monopoly power. Limited competition removes the incentive to operate fairly and in the interests of consumers