Monopolies Flashcards
barriers to entry d
obstacles that stop new firms entering a market
what are the assumptions of monopoly
the firm is the industry , there are barriers to entry
explain assumption about monopoly the firm is the industry
the whole output of the industry is in the hands of a single firm
explain assumption about monopoly that there are barriers to entry
no other firm is able to enter the industry
x - inefficient d
not reducing costs to their lowest level
productive efficiency
when a firm operates at minimum average total cost
example of x - inefficiency for monopolies
providing workers with cars far more luxurious than required
how come supernormal profits can be maintained in monopoly as opposed to perfect competition
if perfect competition other firms would enter the industry, with monopoly there are barriers to entry
patent laws d
a grant of temporary monopoly rights over a new product
nationalised d
taking a firm / industry into public ownership
incumbent d
existing firm(s) in the industry
limit pricing d
setting a price so low that other firms will not enter the industry
sunk costs d
irretrievable costs that occur when a firm will not enter the industry
legal monopoly d
a firm with 25 % or more of the market share
product differentiation d
a way of distinguishing product from that of competitors
how could monopolists use the MES to create barriers of entry
they may operate in an industry where a vast amount of investment is required in capital equipment to achieve the MES
how can monopolies create barriers to entry
patent laws
nationalised industries which prohibit competition by law
where firm has exploited EOS and may use limit pricing
high fixed costs
product differentiation
example of patent laws to create barriers to entry
pharmaceutical companies, Dyson vacuum cleaner
example of how monopolies use high fixed costs to create barriers to entry
advertising that makes it too costly for any new entrant to enter the industry
marginal cost pricing d
setting the price at the level of marginal cost
average cost pricing d
setting the price at the level of average cost
where is the point of marginal cost pricing
MC = AR, the point of allocative efficiency
where is the point of average cost pricing
ATC = AR, the monopolist is making normal profit
why will the monopoly not produce below average cost pricing
it is the lowest price the firm will remain in the industry
what are the characteristics of a natural monopoly
very high capital cost to set up
duplication is unnecessary and wasteful
the MES does not occur until very high output
what happens if natural monopolies have to produce where ATC > AR
they will make a loss which will require a subsidy of the same amount
would authorities allow natural monopolies to produce at MC = MR
no, they would make them produce MC = AR, the point of allocative efficiency
how do you show producer and consumer surplus on a diagram
consumer is above price line, producer is the area beneath
what is consumer surplus
a measure of the welfare that people gain from consuming goods and services, difference between the amount consumers are willing and able to pay (demand curve) and the amount they actually pay (market price)
dead weight loss d
reduction in consumer and producer surplus when output is restricted to less than optimum level
why will monopolies not produce beyond MR = MC
because producing extra units adds more to costs than revenue so would reduce monopoly profit
why are monopolies not economically efficient
because they are neither productively or allocatively efficient
how do you show dead-weight loss on a diagram
the triangle between where S (MC) = D (AR) and where MC = MR and the price at that point on AR
what shape are the producer and consumer surpluses
triangles
what shape are the producer and consumer surpluses in monopoly
consumer is triangle, producer is quadrilateral
how can a monopoly being dynamically efficient benefit consumers
by creating a new lower marginal cost curve they can reduce prices and improve the product
how does the MES relate to monopolies
many small firms competing will not reach MES, if there was a monopoly it would which would reduce costs for consumers
how could allowing monopolies in order to reach the MES benefit the UK
it will be more competitive with foreign firms
who was it who argued that monopolies were responsible for economic progress through R&D
Joseph Schumpeter
explain how monopolies and oligopolies are related to innovation and growth
short-run profits are used in R&D to innovate which leads to growth
what did Joseph Schumpeter argue
monopolists were responsible for economic progress by investing short-run profits in R&D in order to innovate, if they didn’t innovate then other firms would enter the industry and take the profits
price discrimination d
where an identical good / service is sold to different customers at different prices for reasons not associated with costs
how can monopolies appropriate more of the consumer surplus
by indulging in price discrimination
what are the conditions necessary for price discrimination
no other firm can sell it at a lower price
resale is prevented
there are different elasticities of demand
explain condition for price discrimination that no other firm can sell at a lower price
the vendor controls what is offered and there are no other firms that can sell the product at a lower price
explain condition for price discrimination that resale is prevented
traders cannot buy in the cheaper market and sell in the dearer
explain conditions for price discrimination that there are different elasticities of demand
some buyers are prepared to pay more than others
what are the three methods of price discrimination
geographical
by time
age of customer
example of price discrimination by geographical
car companies increase price of car in UK compared to Europe
example of price discrimination by time
train companies charge higher prices at peak times
in the case of passengers on trains price ___ ___ ___ changes with time
elasticity of demand
example of price discrimination by age of customer
adult, pensioner and child are charged different prices to travel on trains, theatre etc.
first degree price discrimination d
when the discriminating firm can charge a separate price to each individual customer
what does first degree price discrimination require
separation of markets
the seller reaching individual bargains with consumers and the supplier being able to estimate what the consumer would be prepared to pay
second degree price discrimination d
when the discriminating firm can charge a separate price to different groups of customer
how do you show second degree price discrimination on a diagram
normal demand curve but different prices for different blocks of customers
third degree price discrimination d
when the discriminating firm can charge a different price in each country
how does the third degree price discrimination work
different markets have different elasticities of demand so the firms will produce where MC = MR in each individual market
what are the advantages of price discrimination for the discriminator
increased profits redistribute income to producers, higher level of total reserve, output larger
explain advantage of price discriminations that the output will be larger
with single price increases in output lead to fall in MR but discriminator can sell more without lowering the price
what are the effects on consumers of price discrimination
loss of welfare, inequitable, possible long term benefits, lower prices may make more affordable
explain effect of price discrimination loss of welfare
consumers’ surplus totally disappears under first degree price discrimination
explain effect of price discrimination inequitable
some consumers have to pay more than others
explain effect of price discrimination long term benefits
if profits are reinvested, consumers may derive long-run benefits such as lower prices
explain effect of price discrimination about lower prices
lower prices may mean poorer consumers may be able to afford the product
