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Microeconomics > Monopolies > Flashcards

Monopolies Flashcards

1
Q

What is a monopoly power?

A

When one firm has more than 25% of market share
- legal monopoly

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2
Q

What is a monopoly?

A
  • When one seller dominates the market
  • Different products so price makers
  • high barrier of entry/exit - super normal profit
  • Imperfect info (Excludes)
  • Firm is profit maximiser
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3
Q

what are the two types of monoploies?

A
  • Pure monopoly (rare)
  • Molopoly power (25% MS
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4
Q

What are the 4 efficency analysis?

A
  1. Allocative efficiency
  2. Productive efficiency
  3. X - efficenciy
  4. Dymanic efficiency
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5
Q

What are the static efficencies?

A

Can’t increase the production of one good without decreasing another
1. Allocative efficiency
2. Productive efficiency
3. X - efficenciy

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6
Q

What is allocative efficency?

A

Price = Marginal Costs, Supply = demand

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7
Q

What happens if there is no allocative efficiency?

A

Exploit customers with higher prices than MC
Lower consumer surplus
Choice decreases
Lack of competitive forces

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8
Q

What is product efficiency?

A

the ability of a firm to produce goods or services at the lowest possible cost, given the level of output and the available technology

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9
Q

What is X - efficiency?

A

X Inefficiency occurs when a firm lacks the incentive to control costs = WASTE
- Lack of competivie drive
- Harder to cut costs

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10
Q

What is dynamic efficiency?

A

occurs over time and is strongly linked to the pace of innovation within a market and improvements in both the range of choice for consumers and also the performance / reliability / quality of products.
- SUPERNORMAL PROFIT

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11
Q

What is supernormal profit?

A

Excess profit of normal profit
- can be used for capital investments, reinvest can be + and -

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12
Q

What do monopolies to do society?

A

Reduce society surplus, bad for society can cause market failure

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13
Q

How to show why monopolies cause Deadweight welfare loss

A

Draw a monopoly graph and use price and quanity of both monopoly and competitive firm
CF - MC (S) = AR (D)

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14
Q

What is price discrimination?

A

Where firms charge different prices to different consumers for identical goods with no difference in cost of production

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15
Q

What are the 3 conditions needed for price discrimination?

A
  1. Price making ability (monopoly power)
  2. Information separate the market (Different PED - online shopping)
  3. Prevent re-sale ( market seepage)
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16
Q

What is market seepage?

A

Resale - a buyer cannot purchase in one market at one price and sell in another at a higher price

17
Q

What is the first degree of price discrimination?

A

Firms set price at what consumers and willing and able to pay
- causing no CS, now supernormal profit

18
Q

What is the second degree of price discrimination?

A

Certain capacity, so they reduce the price to fill these fixed marginal costs
e.g cinemas, hotels
- Gain CS

19
Q

What is the third degree of price discrimination?

A

Exploiting those with inelastic demands (need for commuting) face high prices, whereas those with elastic demand have lower
e.g railways - commuting and leisure travel

20
Q

What are the negatives of price discrimiation?

A
  • Allocative efficenicy
  • Inequality (3rd, low income)
  • Anti-competitive prices (3rd)
21
Q

What are the positives of price discrimination?

A
  • Dynamic efficiency (reinvest)
  • Economies of sale (future lower price)
  • Benefits some (2nd, 3rd) but doesn’t outweigh the cons
  • Cross subsidies (reinvest)
22
Q

What is a natural monopoly?

A

This happens with utility providers
e.g Water, railways, electricyt

23
Q

Characteristics of a natural monoploy

A
  1. Huge fixed costs (starter, infrastructure)
  2. Big potential for economies of scale
  3. Rational for 1 firm to supply market, so competition is undesireable
  4. Competition results in wasteful duplicates of resources and non-exploitation of economy of scale
24
Q

Where is profit maxmising on a graph

A

when marginal cost = marginal revenue

25
Q

Why can’t natural monoploies be profit maximisers?

A

As the products/ service is essential for the nature of society so need regulators to enforce working at allocative efficency
- subsides to cover the LRMC and LRAC difference

26
Q

Are natural monopolies good?

A

With subsides they can work at allocative efficiency, where as if there were competition this wouldn’t be the case

27
Q

Cons of monolpoies

A
  • Allocative inefficiency (£ higher MC, so consumers are exploited
  • Productive inefficiency
  • X inefficiency (waste)
  • Inequalities in necessity markets
28
Q

Pros of monopolies

A
  • Dynamic efficiency - reinvest
  • Greater economies of scale
  • natural monopolies
  • Crossnsubsidation - reinvestt
29
Q

Evaluations for monopolies

A
  • Dynamic efficiency (profits can go elsewhere - pay workers)
  • Different objectives (no Profit max)
  • Regulations
  • Type of goods
  • Price discrimination
30
Q

What are the conditions for monopolistic competition

A
  1. Many buyers/sellers
  2. Slightly diff goods - PED, subs
  3. Low barriers of entry
    4 Good info
  4. Non price competitive
  5. Firms are profit maximisers (MC=MR)
31
Q

Examples of monoploistic competitiors

A

Hairdressers, Taxi, restaurants

32
Q

What hapens in the short run of monoploistic competitiors

A

Have high supernormal profits, can be profit maximisers

33
Q

What happens in the long run of monoploistic competitors

A

New firms will enter as high profits, but demand will shift and will be normal profits

34
Q

What happens to efficiency during long run of monoploistic competitiors

A
  • No allocative efficiency - high costs, less choice
  • No product efficiency
    No dynamic efficiency no high profits
35
Q

How to draw a long run graph for monoploistic competitiors

A
  1. AR and MR (demand)
  2. MC
  3. Profit max at p
    4 AC (semi circle)

Microeconomics (9 decks)

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