5.5 The Advantages And Disadvantages Of Monopoly Flashcards
What two sources do the advantages of monopoly result from?
-economies of scale
-dynamic efficiency
Why is a monopoly good is a small market size?
Because there is insufficient room for more than one firm to benefit from the full economies of scale
What is another key advantage of a monopoly?
-money invested into research and development -leads to better ways to produce existing products and to the development of completely knew products
(Improves dynamic efficiency)
How can monopoly power be eroded?
-patents expire
-innovation by new firms which offer consumer wants and needs
-trade and investment deals open up fresh competition
Is price discrimination an advantage of monopolies?
Yes
What is the anagram regarding monopolies and economic efficiency
SPEW
What does SPEW stand for
Service (lack of competition affects the service for consumers)
Piece(higher prices)
Efficiency (not productive and not allocative)
Welfare(net loss in welfare in a monopoly market
What is dynamic efficiency?
Coming up with new ideas +innovation and investment in research and development
Do we know if a monopoly is dynamically efficient from the graph?
No because we don’t know if the supernormal plots are invested in research and development
When is a firm productively efficient?
When it operates on the lowest point of the ATC curve
What does monopoly power usually result in?
Lower output and higher prices
What are the types of efficiency?
Allocative
Social
Productive
Dynamic
What do all of the types of efficiency link to?
How well a market system allocates scarce resources
What is rationing?
Limiting of goods and services that are in high demand and low supply
What does the market mechanism do if a price is too low or high?
Signals and creates a new equilibrium price
What are the disadvantages of monopolies?(7 aspects)
-x-inefficiency
-allocatively inefffiecnt
-productively inefficient
-high prices for consumers
-less drive to innovate
-diseconomies of scale
-profit suffice
What is allocative efficiency?
When impossible to improve overall economic welfare be reallocating resources between markets
What is productive efficiency.
When it is impossible to produce one more of a good without reducing less of another
(Occurs on the lowest point of ATC)
When can a pure natural monopoly occur?
When for geographical reasons a country is the only suppliers of a good
“Only room in the market for one firm to benefit from full economies of scale’
What must occur for allocative efficiency?
Price=mc
When does x-efficiency occur?
When a firm gets rid of all unneeded production costs
What is x-inefficiency?
When production costs still exist
What does x-inefficientcy look like?
Point above the lowest point of the ATC curve
What makes a monopoly not x-efficient?
-spending on advertising and marketing shouldn’t need to do this as they are the only firm in the market
Why does a monopoly have less drive to innovate?
It is already getting supernormal profits so it doesn’t need to
Why do monopolies profit suffice?
They profit suffice instead of orient maximise because they get last due to being the only firm in the market and having no external competition for those supernormal profits
Why are monopolies giving higher prices and supplying less?
Because there is no where els for consumers to go for the serivce/product so they can afford to increase the price s
Why is a monopoly allocatively inefficient?
Because prices are higher then they would otherwise be in competitive conditions
P>mc
Why is a monopoly not productively efficient?
They don’t need to be due to lack of competition
How do monopolies suffer from diseconomies of scale?
As they get too big the ATC for monopolies start increasing
Diagram to justify monopoly
(For a natural monopoly)
How does this diagram illustrate the advantages of monopoly?
-economies of scale shown by the downward sloping LRAC curve monopolies therefore able to charge a lower price for Q1 than firms in a perfectly competitive market (provided they only look to make normal profit)
Diagram to illustrate the disadvantages of monopoly?
Leads to allocative and productive inefficiency
Describe this diagram
(In the absence of benefit’s associated with economies of scale and successful innovation)
-productivity inefficient because total costs at point D not point C
-allocatively inefficient as price shown at B is > than marginal cost (A)
Diagram for x-inefficiency in a monopoly
Use the diagram to explain why a firm may choose to be x-inefficient rather than x-efficient
If the monopoly produces output level Q1 without incurring unnecessary production costs it’s average cost per unit of output is shown at D
However the monopoly produces at point Z not D(unnecessary production costs)
-monopoly can do this and can survive making ‘satisfactory profits’ rather than maximising them because the barriers to entry
