LS10 - Monopoly Flashcards
What is a monopoly in economic terms?
A monopoly is a market structure with a single seller of a good.
What is the role of the Competition and Markets Authority (CMA) in the UK regarding monopolies?
The CMA monitors monopoly markets and investigates mergers that result in a firm holding more than 25% of a market.
What are the key assumptions of the monopoly model?
The monopoly model assumes:
A single seller of a good
No substitutes for the good, actual or potential
Barriers to entry and exit from the market.
What is the objective of a monopoly firm?
A monopoly firm aims to maximize profits.
How does a monopoly firm stay insulated from competition?
A monopoly is insulated from competition due to having no substitutes for its product and barriers to market entry that protect its position.
Why is the monopoly model considered the opposite of perfect competition?
The monopoly model has assumptions that contrast with perfect competition, such as having a single seller and no substitutes, positioning it at the opposite end of the market structure spectrum.
How does a monopoly firm’s demand curve differ from that of a firm in perfect competition?
A monopoly firm faces a downward-sloping demand curve, unlike in perfect competition, where firms face a horizontal demand curve.
What kind of influence does a monopolist have over price?
A monopolist can influence both price and output but is still constrained by market demand.
What happens to total revenue when demand is elastic versus when it is inelastic?
Total revenue increases with a price fall when demand is elastic and decreases when demand is inelastic.
At what point does a monopolist aiming to maximize profits choose to produce?
A monopolist maximizes profits by producing at the level where marginal revenue (MR) equals marginal cost (MC).
How does a monopolist determine the price for its profit-maximizing output?
After selecting the output at MR = MC, the monopolist chooses the price that clears the market for that output, identified from the demand curve.
In which segment of the demand curve does a monopolist operate when maximizing profits?
A monopolist always operates in the elastic segment of the demand curve, where marginal revenue is positive.
How do barriers to entry affect monopoly profits?
Barriers to entry prevent other firms from entering the market and competing away the supernormal profits that the monopoly firm earns.
Can a monopoly always guarantee supernormal profits?
No, the size of monopoly profits depends on the relative position of the market demand curve and the firm’s cost curves
What happens if a monopoly’s cost curves are higher than expected?
If cost curves are higher, the monopoly could incur losses because the profit-maximizing price might be below the average cost.
