4.2 Monopolies

Question 1

Monopoly

Answer 1

Where there is one seller in the market. A Monopoly is considered at 51% market share.

Question 2

Monopolistic power

Answer 2

More than 25% market share

Question 3

Barriers to entry

Answer 3

It is difficult for firms to join the market because of barriers- these can be legal, structural or strategic

Question 4

Structural barriers

Answer 4

Costs of infrastructure mean that it is difficult for a rival firm to join the market. They will struggle to establish the infrastructure on the same scale so their average costs will be higher.

Question 5

Strategic barriers

Answer 5

Where the monopoly firm lowers prices or ties customers into deals where rivals cannot access them or compete.

Question 6

Legal barriers

Answer 6

Protection through a patent or licence from the government.

Question 7

Barriers to exit

Answer 7

Firms find it difficult to exit the market without making a loss.

Question 8

Price maker

Answer 8

A monopoly can choose the price or the level of output for the market and is likely to choose a rpice higher than the cometitive market.

Question 9

No close substitutes

Answer 9

The nature of the Monopoly means consumers cannot substitute the good for another product.

Question 10

What type of profit can the monopoly make in the short and long run?

Answer 10

Supernormal

Question 11

What type of efficiency would a monopolist have?

Answer 11

Dynamic- with supernormal profits the firm can innovate and develop new products and methods of production.

Question 12

Is the Monopolist allocatively efficient?

Answer 12

No- The price does not equal MC.

Question 13

Is the monopolist productively efficient?

Answer 13

No, a profit maximising monopolist would not operate at the bottom of the AC curve.

Question 14

What is X-inefficiency?

Answer 14

Lack of incentive to reduce costs

Question 15

First degree price discrimination

Answer 15

Where monopolists sell each good at the price a consumer is willing to buy. This maximises welfare in the market but gives it all to the producer.

Question 16

Third degree price discrimination

Answer 16

Where the monopolist distinguishes between groups of consumers.

Question 17

Advantages of a monopoly

Answer 17

Dynamically efficient; econonmies of scale (reducing average costs); may be able to compete internationally; can help to create new jobs and products with reinvested profits,; can avoid duplication and the constant destruction of perfect competition.

Question 18

Disadvantages of monopolies

Answer 18

High prices for consumers, X-Inefficiency; less incentive to innovate due to a lack of competition; diseconomies of scale; less choice for consumers; allocatively inefficient; productively inefficient.

Question 19

Natural monopoly

Answer 19

This is where there are large economies of scale so that one firm is only viable.

Question 20

Regulation of monopoly

Answer 20

Where governments try to regulate natural monopolies by- price limiting, profit regulation, quality standards, performance targets.