5.5 The Advantages And Disadvantages Of Monopoly

Question 1

What two sources do the advantages of monopoly result from?

Answer 1

-economies of scale
-dynamic efficiency

Question 2

Why is a monopoly good is a small market size?

Answer 2

Because there is insufficient room for more than one firm to benefit from the full economies of scale

Question 3

What is another key advantage of a monopoly?

Answer 3

-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)

Question 4

How can monopoly power be eroded?

Answer 4

-patents expire

-innovation by new firms which offer consumer wants and needs
-trade and investment deals open up fresh competition

Question 5

Is price discrimination an advantage of monopolies?

Answer 5

Yes

Question 6

What is the anagram regarding monopolies and economic efficiency

Answer 6

SPEW

Question 7

What does SPEW stand for

Answer 7

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

Question 8

What is dynamic efficiency?

Answer 8

Coming up with new ideas +innovation and investment in research and development

Question 9

Do we know if a monopoly is dynamically efficient from the graph?

Answer 9

No because we don’t know if the supernormal plots are invested in research and development

Question 10

When is a firm productively efficient?

Answer 10

When it operates on the lowest point of the ATC curve

Question 11

What does monopoly power usually result in?

Answer 11

Lower output and higher prices

Question 12

What are the types of efficiency?

Answer 12

Allocative
Social
Productive
Dynamic

Question 13

What do all of the types of efficiency link to?

Answer 13

How well a market system allocates scarce resources

Question 14

What is rationing?

Answer 14

Limiting of goods and services that are in high demand and low supply

Question 15

What does the market mechanism do if a price is too low or high?

Answer 15

Signals and creates a new equilibrium price

Question 16

What are the disadvantages of monopolies?(7 aspects)

Answer 16

-x-inefficiency
-allocatively inefffiecnt
-productively inefficient
-high prices for consumers
-less drive to innovate
-diseconomies of scale
-profit suffice

Question 17

What is allocative efficiency?

Answer 17

When impossible to improve overall economic welfare be reallocating resources between markets

Question 18

What is productive efficiency.

Answer 18

When it is impossible to produce one more of a good without reducing less of another

(Occurs on the lowest point of ATC)

Question 19

When can a pure natural monopoly occur?

Answer 19

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’

Question 20

What must occur for allocative efficiency?

Answer 20

Price=mc

Question 21

When does x-efficiency occur?

Answer 21

When a firm gets rid of all unneeded production costs

Question 22

What is x-inefficiency?

Answer 22

When production costs still exist

Question 23

What does x-inefficientcy look like?

Answer 23

Point above the lowest point of the ATC curve

Question 24

What makes a monopoly not x-efficient?

Answer 24

-spending on advertising and marketing shouldn’t need to do this as they are the only firm in the market

Question 25

Why does a monopoly have less drive to innovate?

Answer 25

It is already getting supernormal profits so it doesn’t need to

Question 26

Why do monopolies profit suffice?

Answer 26

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

Question 27

Why are monopolies giving higher prices and supplying less?

Answer 27

Because there is no where els for consumers to go for the serivce/product so they can afford to increase the price s

Question 28

Why is a monopoly allocatively inefficient?

Answer 28

Because prices are higher then they would otherwise be in competitive conditions P>mc

Question 29

Why is a monopoly not productively efficient?

Answer 29

They don’t need to be due to lack of competition

Question 30

How do monopolies suffer from diseconomies of scale?

Answer 30

As they get too big the ATC for monopolies start increasing

Question 31

Diagram to justify monopoly

Answer 31

(For a natural monopoly)

Question 32

How does this diagram illustrate the advantages of monopoly?

Answer 32

-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)

Question 33

Diagram to illustrate the disadvantages of monopoly?

Answer 33

Leads to allocative and productive inefficiency

Question 34

Describe this diagram

Answer 34

(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)

Question 35

Diagram for x-inefficiency in a monopoly

Answer 35

Question 36

Use the diagram to explain why a firm may choose to be x-inefficient rather than x-efficient

Answer 36

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