4.2 Monopoly

Question 1

What are the characteristics of a monopoly

Answer 1

Profit maximisation. Monopolist firms earn supernormal profits in both short and long run

Sole seller in the market

High barriers to entry

Price maker

Question 2

What consists of a legal monopoly in the UK

Answer 2

When one firm dominated the market with more than 25% market share

Question 3

What is meant by dynamic efficiency

Answer 3

It is concerned with new technology and increases in productivity which causes efficiency to increase over a period of time

Question 4

What is meant by x-inefficiency

Answer 4

A firm is x-inefficient when it is producing within the AC boundary. Costs are higher than they would be with competition in the market

Question 5

How can you show x-inefficiency on a diagram

Answer 5

The X shows a point of x-inefficiency

Question 6

What factors influence monopoly power

Answer 6

Barriers to entry

Economies of scale

Limit pricing

Sink costs

Brand loyalty

Set up costs

Number of competitors

Question 7

How would supernormal profits for a monopoly be shown on a diagram

Answer 7

Question 8

What is meant by price discrimination

Answer 8

This occurs in a monopoly, when the monopolist decides to charge different groups of consumers different prices for the same good or service

Question 9

Explain the diagram when inelastic demand will have a higher price

Answer 9

Question 10

Explain the diagram where elastic demand will have a lower price

Answer 10

Question 11

Explain the diagram showing a firms costs and revenues with supernormal profit

Answer 11

Question 12

Why do monopolists charge different prices

Answer 12

This is in order to maximise their overall profits

Question 13

What is meant by first degree price discrimination with example

Answer 13

This is when each consumer is charged a different price

A lawyer may charge a high income family more than a low income family

Question 14

What is meant by second degree price discrimination with example

Answer 14

This is when prices are different according to the volume purchased

Gas prices can vary with volume

Question 15

What is meant by third degree price discrimination with example

Answer 15

This is when different groups of consumers are charged a different price for the same good or service

The higher price at peak times on trains

Question 16

What are the costs to consumers of price discrimination

Answer 16

Results in a loss of consumer surplus. P>MC so there is a loss of allocative efficiency

Strengthens monopoly power of firms which could result in higher prices in the long run

Question 17

What are the benefits to consumers of price discrimination

Answer 17

Could benefit from net welfare gain if they receive a lower price

Consumers who were excluded by high prices might now benefit from the good or service. This can yield positive externalities

Question 18

What are the costs to producers of price discrimination

Answer 18

If it is used as predatory pricing then the firm could face investigation

Might cost the firm to divide the market which limits the benefits they could gain

Question 19

What are the benefits to producers of price discrimination

Answer 19

Can make better use of spare capacity

Higher supernormal profits which help investment

If profits are made in one market then that could be used to subsidise losses in another market

Question 20

Advantages of a monopoly

Answer 20

Can earn significant supernormal profits so will invest in R&D yielding positive externalities

Could be more efficient for one firm to provide instead of multiple

Monopolies can generate export revenue

Exploit economies of scale lowering average costs of production

High profits means more government revenue

Question 21

Disadvantages of a monopoly

Answer 21

There is often inefficiency and misallocation of resources

Could exploit consumers by charging higher prices making the good under consumed

Monopolies have no incentive to become more efficient

Loss of consumer surplus and gain of producer surplus

Lack of consumer choice

Question 22

What is a natural monopoly

Answer 22

This is an industry which is most efficient when only one firm produces the good or services rather than several

Question 23

Advantages of a natural monopoly

Answer 23

Can benefit from economies of scale through lower average costs

A sole provider may reduce inefficient duplication of goods or services

Question 24

Disadvantages of a natural monopoly

Answer 24

Lack of choice for consumers or risk of over provisions if there are several suppliers