9.2 - Signposting

Question 1

Monopoly Performance Cons

Answer 1

1. Monopolies Produce Outcomes that are allocatively inefficient (excess pricing)
2. Monopolies forgo some economies voluntarily in order to produce at the profit maximising point. Therefore Monopolies are productivey inefficient
3. Monopolies can be X-inefficient

Question 2

Monopoly Performance Pros

Answer 2

1. Monopolies can be dynamically efficient
2. Monopolies can cross-subsidise loss making goods
3. Even though Monopolies are productively inefficient they still may be exploiting greater economies of scale than smaller competitive firms

Question 3

Monopoly Performance Evaluation

Answer 3

1. Monopolies that are heavily regulated may not produce the inefficient outcomes that theory
   suggests
2. Although monopolists make long run supernormal profit, there is no guarantee this profit will be used
   for re-investment and thus dynamic efficiency may not occur
3. Profit maximisation is not the objective of all monopolists. Other objectives that promote the public
   interest such as sales maximisation, allocative efficiency or corporate social responsibilities might be
   followed instead which will promote efficient outcomes that benefit consumers such as lower prices and
   higher quantities.
4. If the monopoly is a natural monopoly is makes sense for one firm to supply the entire industry,
   where competition would promote a wasteful duplication of resources and allocative inefficiency. This is
   true as long as the natural monopoly is regulated to produce at allocatively efficient outcomes;
   competition here is not in the best interests of society and would reduce welfare.
5. The economies of scale and diseconomies of scale arguments are very significant. Whichever
   argument holds in reality depends on where the monopolist is producing on their average cost curve.
6. If a monopoly market is contestable, the end outcomes may not be harmful for society.

Question 4

What are the 5 Monopoly Characteristics?

Answer 4

The 5 Monopoly Characteristics are: 1) There is one dominant firm in the market. 2) The goods and services produced are differentiated. 3) There are high barriers to entry and exit for firms. 4) There is imperfect information/knowledge of market conditions for both consumers and producers. 5) Firms are profit maximisers producing where marginal cost = marginal revenue at all times.

Question 5

How do firms behave in a monopoly market?

Answer 5

Firms are profit maximisers and produce where marginal cost equals marginal revenue at all times.

Question 6

Monpoly - Firm Behaviour

Diagram

Answer 6

A profit maximising monopoly will produce where MC=MR, at Qm with a price at Pm. At this level of production AR>AC therefore supernormal profits are being made indicated by the shaded area. These profits can be sustained in the long run due to the high barriers TO entry preventing new firms entering the market and thus this is the long run equilibrium position for a profit maximising monopoly.

Question 7

How can monopolies be more productively efficient than smaller competitive firms?

Monopoly Performance Pros + Draw Diagram

Answer 7

• Even though monopolists are productively inefficient, they may still be exploiting greater economies of scale than smaller competitive firms who produce lower levels of output given the ferocity of the competition. The costs of production can be lower for monopolists at MCm, compared to competitive firms at MCc, given their greater economies of scale exploitation resulting in lower prices charged and higher quantities produced than competitive firms.
• The diagram shows a comparison between a monopoly and a perfectly competitive market. The monopolist produces at quantity Qm and price Pm, while the competitive firm produces at quantity Qc and price Pc. The monopolist is shown to have a lower average cost at MCm compared to the competitive firm at MCc. This is because the monopolist is exploiting greater economies of scale, allowing them to produce at a lower average cost than the competitive firm. As a result, the monopolist is able to charge a lower price and produce a higher quantity than the competitive firm, even though they are productively inefficient.