3.4.5 - Monopoly Flashcards
What Is A Monopoly?
(2 Points)
~ Exists where one firm, is the sole seller of a product in the market.
~ Exists in the form of a pure monopoly and monopoly power.
What Is A Pure Monopoly?
(2 Points)
~ One firm with 100% market share.
~ Not very realistic.
What Is Monopoly Power?
Firm has the potential to act like a monopoly.
What Are The Characteristics Of Monopolies?
(6 Points)
~ One seller dominating the market.
~ Differentiated products sold.
~ Firms are price makers.
~ High barriers to entry and exit.
~ Imperfect information of market conditions.
~ Firm is a profit maximiser, producing where MC = MR.
Draw The Profit Maximising Equilibrium For Monopolies & Explain It
(3 Points)
~ Firms are price makers, meaning downward sloping AR curves.
~ Profit maximisation point, is where MR = MR.
~ Firms are able to make SNP or a loss in the LR, due to high barriers to entry and exit.
What Are The Conclusions, In Terms Of Efficiencies That Can Be Made?
(4 Points)
~ There is no AE.
~ There is no PE.
~ There is no XE.
~ There is DE.
Describe Why There Is No AE, Within The Monopoly Market Structure
(4 Points)
~ Price is higher than where MC = AR.
~ Producers are charging prices, which are higher than what it costs to produce.
~ Consumers are being exploited, due to the higher prices, restriction of output and choice.
~ Quality may be falling aswell, as there is no competitive incentive.
Describe Why There Is No PE, Within The Monopoly Market Structure
(2 Points)
~ Not producing on the minimum point of their AC.
~ Not exploiting full EOS, driving up prices.
Describe Why There Is No XE, Within The Monopoly Market Structure
(2 Points)
~ Waste begins to creep in.
~ This is because they become complacent, due to a lack of competitive drive.
Describe Why There Is DE, Within The Monopoly Market Structure
(3 Points)
~ LR SNP are being made.
~ Higher barriers to entry and imperfect information, preventing new entrants from stealing the SNP.
~ Allows for reinvestment.
When Does 3rd Degree Price Discrimination Occur?
(3 Points)
~ When a firm is able to segment the market, into different PEDs.
~ Firm recognises different PEDs based on times of the day, age and geographical location.
~ They would then charge different prices to the different groups.
What Are The Conditions Needed For Price Discrimination To Occur?
(3 Points)
~ Price making ability, they need monopoly power.
~ Information to separate the market into different PEDs.
~ Prevent re-sale of a good, doesn’t benefit the firm.
Draw The Graph For 3rd Degree Price Discrimination & Explain It
(3 Points)
~ There is constant MC.
~ Firms profit maximise in both cases, where MC = MR.
~ By charging 2 prices, firms are able to maximise their joint profits.
What Are The Benefits Of 3rd Degree Price Discrimination?
(4 Points)
~ DE, due to greater profits.
~ More quantity, means EOS benefits.
~ Some consumers do benefit (Elastic).
~ Cross subsidisation, off inefficient segments of the business.
What Are The Drawbacks Of 3rd Degree Price Discrimination?
(3 Points)
~ Allocative inefficiency, means higher prices.
~ Inequalities, as some benefit more than others.
~ Anti-competitive pricing, driving out competitors, leaving firms with pure monopoly power.
What Is A Natural Monopoly?
(2 Points)
~ When the nature of the industry, only allows one firm to operate in it.
~ E.g. National rail + grid and Royal Mail.
What Are The Characteristics Of A Natural Monopoly?
(4 Points)
~ Huge fixed costs.
~ Huge potential for EOS.
~ Competition is undesirable.
~ High sunk costs, such as infrastructure.
Why Is Competition Undesirable In A Natural Monopoly?
(2 Points)
~ Results in a wasteful replication of resource.
~ EOS would not be exploited, generating productive inefficiencies.
Draw The Graph For Natural Monopoly & Explain It
(5 Points)
~ LRAC is downward sloping over a huge quantity range, due to EOS.
~ MES, occurs at a very high quantity level.
~ Profit maximisers, producing where MR = MC and generate SNP.
~ Government regulates where P = LRMC.
~ Subnormal profit being made, due to AC > AR.
What Are The Outcomes Of Natural Monopolies & Why Do Regulators Intervene?
(5 Points)
~ High prices and low quantities, compared to AE (P = LRMC).
~ These are essential markets for the functioning of the economy, so price needs to fall and quantity needs to rise.
~ Government regulates where P = LRMC, implementing a max price.
~ But this means they make subnormal profit as AC > AR.
~ Governments offer a subsidy of the subnormal profit, to cover their costs.
What Are The Outcomes For Natural Monopolies, Once Regulated?
(3 Points)
~ AE.
~ PE.
~ If not regulated, leads to higher prices and lower quantities.
What Are The Benefits Of Monopolies?
(3 Points)
~ DE, to reinvest, but there is a lack of competitive drive.
~ Regulated natural monopolies.
~ Cross-subsidise, for a loss making product.
What Are The Drawbacks of Monopolies?
(4 Points)
~ Allocative inefficiency.
~ Productive inefficiency, not minimising their costs.
~ X inefficient, allowing for waste and excess costs.
~ Inequalities in necessity markets.
