4.2 Monopoly Flashcards
What is a monopoly
Situation in which there is a single seller in the market with no competitors
What are the characteristics of a monopoly
A single seller in the market- true monopoly has single seller
Barriers to entry in the market- difficult for other firms to set up and compete
Barriers to exit from market- firms may find it difficult to exit market without making a loss
Price maker- monopoly can choose price and set it higher than competitive market
No close substitutes- difficult for customers to substitute product for anything else
Supernormal profits- able to make supernormal profits in both short and long run
What is the diagram of a monopoly ?
Import image page 84
What is the efficiency of a monopoly
Productive efficiency is to operate at lowest point of AC curve. A profit maximising monopolist would not operate at this point
Allocative efficiency is concerned with the optimal distribution of products. A profit maximising monopolist would have higher price than MC.
Therefore monopoly is unlikely to be allocative or productively efficient
May be dynamically efficient- in monopoly barriers to keep new entrants out of market and firm can innovate and gain supernormal profits in long term. Therefore there is an incentive for monopoly’s to be dynamically efficient
What is dynamic efficiency ?
Incentive to innovate products and processes to become productively efficient in the long term
It refers to change and innovation in the market
- many markets need innovation to develop new products and methods of production
- there is an incentive for a monopoly to be dynamically efficient because there are barriers to keep new entrants out so the firm can innovate and gain supernormal profits
What is X- efficiency
Lack of incentive to reduce costs
Explain x efficiency for monopoly
There is no incentive for monopolies to look for ways to keep costs as low as possible
Explain competitive markets
Every customer pays the market price. This is because a customer would simply go elsewhere to but the product if prices were higher. This leads to consumer surplus for some customer willing to pay a higher price .
What happens in monopolies compared to competitive markets ?
In monopoly customer does not have a choice to go somewhere else- only one seller
Therefore they can use price discrimination and charge customers what they’re willing to pay, not the market price. This leads to consumer surplus being directed to the monopoly as opposed to being a benefit to the consumer.
What is price discrimination
The ability of a firm to charge different prices to different customers
What are the advantages of a monopoly
Can be dynamically efficient- more profit, more innovation
Can gain economies of scale,reducing average costs
May be able to compete internationally,whereas smaller firms may not
Supernormal profits can be reinvested,creating more jobs and new products
What are the disadvantages of a monopoly
High prices for customers
X-efficiency leading to higher average costs
Less incentive to innovate due to lack of competition
Can be so large suffers from diseconomies of scale
Less choice for consumers
Allocatively inefficient
Productively inefficient
what is a natural monopoly ?
Type of monopoly in which there are large economies of scale to be gained to the point where only one firm is viable
What is a price maker ?
A firm that has the ability to choose at what price to sell its products
Advantages and disadvantages of a natural monopoly
It has the same Advs and Disadvs as any other monopoly
However
the advantage of economies of scale is so great it may be logical for a govt to allow the monopoly to exist
