Market Structures (Monopolies)

Question 1

What are the main conditions of monopoly markets?

Answer 1

1. One single supplier/firm dominates the market
2. Firms are price makers
3. High barriers to entry/exit
4. Product differentiation, Branding (brand loyalty)
5. Firms are profit maximisers

Question 2

What is a legal monopoly?

Answer 2

When a firm holds 25% or more market share, like Tesco, in the retail market

Question 3

Why can supernormal profits be retained in the long run in monopoly markets?

Answer 3

Because barriers to entry make it harder for new firms to join the market and compete away the supernormal profits

Question 4

At what point is a firm allocatively efficient? And can allocative efficiency be achieved in a monopoly market, why?

Answer 4

Allocative efficiency point is when price is equal to marginal cost (P = MC). This cannot be achieved in a monopoly market because the price is greater than the marginal cost (P > MC).

Question 5

At what point is a firm productively efficient? Is a monopoly firm productively efficient?

Answer 5

At the lowest point on the average cost curve. A monopoly firm is not productively efficient.

Question 6

At what point is a firm dynamically efficient?

Answer 6

When supernormal profits are made

Question 7

What type of efficiency can be achieved in a monopoly market? And how can this type of efficiency be achieved?

Answer 7

Dynamic Efficiency. High barriers to entry protect monopoly firms, allowing them to innovate and create new products which can lead to higher profits AND dynamic efficiency.

Question 8

What are IRP’s and how do they affect monopoly markets?

Answer 8

Intellectual property rights - and they protect a firm from other firms using their innovate ideas and competing away supernormal profits