Evaluating Competition and Monopoly Flashcards
Perfect Competition in the long run
In the long run, firms cannot earn abnormal profit, if firms earn abnormal profit, this will give new firms an incentive to enter the market, therefore increasing output and lowering prices, until abnormal profit is eliminated.
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A perfectly competitive firm operates productively efficient in the long run because they are operating at point A, which is the lowest ATC. Also it is allocatively efficient because it operates where P = MC
If a firm in a profit maximiser, then it will be both productively and allocative efficient.
How do natural monopolies arise?
Natural monopolies could possible arise if a firm has an agreement with the government/government-owned firms to supply resources eg gas, electricity. One example is the British Rail, owned by the national grid.
How could trademarks and copyright lead to monopolies arising?
A trademark is a legal patient applied onto a product to stop other firms taking ideas from. A copyright is also a legal patient generally applied to films, songs etc. These can lead to monopolies arising because they would be a barrier to entry because it would be illegal to produce a similar product.
Multi-plant monopolists
One sole producer in an industry but where production takes place at a number of different sites or plants, each of which could be sold off to provide competition in the industry.
The multi-plant monopolist is allocative inefficient. Output will be lower and price higher in monopoly than under perfect competition.
Firms are allocative inefficient because if firms want to increase profits, they will increase prices past MC.
Creative destruction
When firms produce or create innovative new products that replace or destroy existing products in the market.
Monopolies may engage in creative destruction.
