4.2 Monopoly Flashcards
What is a Monopoly?
a monopoly is a firm that lacks any viable competition, and is the sole producer of the industry’s product.
Unrealistic - often a firm with more than 25% of market share considered a legal monopoly.
What is a natural monopoly?
A monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable.
What are the key charcterisitics of a Monopoly?
1) One dominant firm
2) Differentiated products
3) High barriers to entry and exit
4) imperfect information
5) Firm is a Profit maximiser
Why Is a monopoly considered allocatively inefficient?
all. efficiency occurs when P=MC, however, in a monopoly due to the fact they are price makers they set prices above the MC, charging higher rices than what it costs to produce, exploiting consumers by charging high prices, restricting output and as a result reducing consumer welfare.
Why Is a monopoly considered Productively inefficient?
in a monopoly they voluntarily forgo economies of scale and do not produce on the minimum efficient scale of the average cost curve. ( produce slightly tp the left)
Why are monopolies price makers? How does this differ from perfect competition?
A monopoly price is set by a seller with market power; that is, a seller who can drive up the price by reducing the quantity he sells, as opposed to “perfect competition”, under which sellers simply take the market price as given.
why is a monopoly considered X-inefficient?
Monopolist is likely to produce above their average cost curve, allowing for wasteful duplication of resources when they forgo EOS, causing them to incur excess costs.
This may be due to the fact there is complacency on the allocation of resources goven there is a lack of competitive forces so don’t need to minimise costs.
Why is a monopoly considered Dynamically efficient?
Monopolist firms are dynamically efficient due to long run supernormal profits which can be invested into research and development and technological innovation. This is a result of high barriers to entry/ exit and imperfect information helping firm sustain supernormal profits in the long run.
What are the characteristics of a natural monopoly?
1) Huge fixed costs
2) Enormous potential for economies of scale.
3) Rational for 1 firm to supply the entire market - competition is undesireable
4) competition would result in wasteful duplication of resources and not full exploitation of full EOS.
Examples of a natural monopoly?
- National Grid
- London underground
What is the relationship between economies of scale and a natural monopoly?
- Natural monopolies arise because of ecnomies of scale, making it more efficient for a single company to provide a particular service.
What is nationalisation?
- nationalisation is where a privately owned firm or industry is taken into public ownership.
What is Privatisation?
where an enterpirse in public ownership is returned to private ownership.
Explain the relationship between average and marginal revenue?
- Mr is twice as steep as AR=D as when you lower tge price you have to lower prices of all prices before aswell.
what is the market equilibrium condition?
MC= MR
