4.2 Monopoly Flashcards
What are the characteristics of a monopoly
Profit maximisation. Monopolist firms earn supernormal profits in both short and long run
Sole seller in the market
High barriers to entry
Price maker
What consists of a legal monopoly in the UK
When one firm dominated the market with more than 25% market share
What is meant by dynamic efficiency
It is concerned with new technology and increases in productivity which causes efficiency to increase over a period of time
What is meant by x-inefficiency
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
How can you show x-inefficiency on a diagram
The X shows a point of x-inefficiency
What factors influence monopoly power
Barriers to entry
Economies of scale
Limit pricing
Sink costs
Brand loyalty
Set up costs
Number of competitors
How would supernormal profits for a monopoly be shown on a diagram
What is meant by price discrimination
This occurs in a monopoly, when the monopolist decides to charge different groups of consumers different prices for the same good or service
Explain the diagram when inelastic demand will have a higher price
Explain the diagram where elastic demand will have a lower price
Explain the diagram showing a firms costs and revenues with supernormal profit
Why do monopolists charge different prices
This is in order to maximise their overall profits
What is meant by first degree price discrimination with example
This is when each consumer is charged a different price
A lawyer may charge a high income family more than a low income family
What is meant by second degree price discrimination with example
This is when prices are different according to the volume purchased
Gas prices can vary with volume
What is meant by third degree price discrimination with example
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
What are the costs to consumers of price discrimination
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
What are the benefits to consumers of price discrimination
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
What are the costs to producers of price discrimination
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
What are the benefits to producers of price discrimination
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
Advantages of a monopoly
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
Disadvantages of a monopoly
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
What is a natural monopoly
This is an industry which is most efficient when only one firm produces the good or services rather than several
Advantages of a natural monopoly
Can benefit from economies of scale through lower average costs
A sole provider may reduce inefficient duplication of goods or services
Disadvantages of a natural monopoly
Lack of choice for consumers or risk of over provisions if there are several suppliers
