3.4.5 Monopoly

Question 1

What are three characteristics of a monopoly

Answer 1

1- Firm has more than 25% of total market sales
2- Price setting power
3- High entry and exit barriers

Question 2

Where is the profit maximising equilibrium of a monopoly

Answer 2

• Where MC=MR

Question 3

What are some benefits of a monopoly to a firm

Answer 3

• Monopolies being price setters, owners will benefit from higher levels of supernormal profits via dividends
• Monopolies should be able to achieve economies of scale as they dominate the market
• Monopolies should be able to compete internationally

Question 4

What are some negatives of a monopoly to a firm

Answer 4

• Monopolies may face greater scrutiny and regulation
• Monopolies may experience diseconomies of scale, due to communication issues

Question 5

What are some benefits of monopolies to consumers

Answer 5

• Consumers can benefit from R and D
• Consumers may gain lower prices via economies of scale

Question 5

What are some negatives of monopolies to consumers

Answer 5

• Consumers may suffer from higher prices, which will lead to allocative inefficiency and loss of consumer surplus
• Consumers may lack a choice of quality products

Question 6

What are some benefits of monopolies to employees

Answer 6

• Employees may benefit from high levels of job security as the firm is expanding FOPs
• Employees may gain higher wages and bonuses

Question 7

What are some negatives of monopolies to employees

Answer 7

• Employees may have fewer employment opportunities due to monopolies restricting output and a lower derived demand for labour
• Employees may be exploited by lower wages as there arent enough firms willing to take on workers

Question 8

What are some benefits of monopolies to suppliers

Answer 8

• Suppliers may benefit from higher sales and profits
• Suppliers may benefit from a long term relationship which can prove to be a strong long term stream of revenue

Question 9

What are some negatives of monopolies to suppliers

Answer 9

• Suppliers may be exploited as they may be the only firm buying from the supplier, therfore a higher bargaining power

Question 10

What is the definition of price discrimination

Answer 10

• When a firm sells the same product, at a different price in different markets

Question 11

What are the conditions of price discrimination

Answer 11

• Two distinguishable markets with different PEDs
• Market Power
• No arbitrage

Question 12

What are some of the aims of price discrimination

Answer 12

• Increase market share
• To make more efficient use of spare capacity
• To generate cash flow during times of recession

Question 13

What is 3rd degree price discrimination

Answer 13

• Charging different prices to two groups with different PED

Question 14

Draw the third degree price discrimination diagrams

Answer 14

• Correct diagram drawn with labels

Question 15

What are the cons of price discrimination to consumers

Answer 15

• Allocative inefficiency as firms are charging way over MC
• Can widen income inequality people with low incomes may be apart of the income inelastic market

Question 16

What are the benefits of price discrimination to consumers

Answer 16

• Cross subsidisation, lower priced products are still availabvle
• Some elastic consumers may benefit from lower price

Question 17

What are the benefits of price discrimination to firms

Answer 17

• May lead to EcoS due to higher output
• Dynamic efficiency due to higher levels of SNP

Question 18

What are some of the disadvantages of PD to firms

Answer 18

• Higher administrative costs such as marketing and research as they must segment a market
• May receive scrutiny from regulatory bodies as it may be abusing monopoly power

Question 19

What is the definition of a natural monopoly

Answer 19

• The situation where only one firm can benefit from full economies of scale .

Question 20

What are the characteristics of a natural monopoly

Answer 20

high fixed cost
High levels of economies of scale
Rational for 1 firm to supply the entire market