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Economics Unit 3 > Monopolies > Flashcards

Monopolies Flashcards

1
Q

barriers to entry d

A

obstacles that stop new firms entering a market

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2
Q

what are the assumptions of monopoly

A

the firm is the industry , there are barriers to entry

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3
Q

explain assumption about monopoly the firm is the industry

A

the whole output of the industry is in the hands of a single firm

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4
Q

explain assumption about monopoly that there are barriers to entry

A

no other firm is able to enter the industry

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5
Q

x - inefficient d

A

not reducing costs to their lowest level

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6
Q

productive efficiency

A

when a firm operates at minimum average total cost

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7
Q

example of x - inefficiency for monopolies

A

providing workers with cars far more luxurious than required

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8
Q

how come supernormal profits can be maintained in monopoly as opposed to perfect competition

A

if perfect competition other firms would enter the industry, with monopoly there are barriers to entry

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9
Q

patent laws d

A

a grant of temporary monopoly rights over a new product

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10
Q

nationalised d

A

taking a firm / industry into public ownership

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11
Q

incumbent d

A

existing firm(s) in the industry

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12
Q

limit pricing d

A

setting a price so low that other firms will not enter the industry

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13
Q

sunk costs d

A

irretrievable costs that occur when a firm will not enter the industry

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14
Q

legal monopoly d

A

a firm with 25 % or more of the market share

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15
Q

product differentiation d

A

a way of distinguishing product from that of competitors

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16
Q

how could monopolists use the MES to create barriers of entry

A

they may operate in an industry where a vast amount of investment is required in capital equipment to achieve the MES

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17
Q

how can monopolies create barriers to entry

A

patent laws
nationalised industries which prohibit competition by law
where firm has exploited EOS and may use limit pricing
high fixed costs
product differentiation

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18
Q

example of patent laws to create barriers to entry

A

pharmaceutical companies, Dyson vacuum cleaner

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19
Q

example of how monopolies use high fixed costs to create barriers to entry

A

advertising that makes it too costly for any new entrant to enter the industry

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20
Q

marginal cost pricing d

A

setting the price at the level of marginal cost

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21
Q

average cost pricing d

A

setting the price at the level of average cost

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22
Q

where is the point of marginal cost pricing

A

MC = AR, the point of allocative efficiency

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23
Q

where is the point of average cost pricing

A

ATC = AR, the monopolist is making normal profit

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24
Q

why will the monopoly not produce below average cost pricing

A

it is the lowest price the firm will remain in the industry

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25
Q

what are the characteristics of a natural monopoly

A

very high capital cost to set up
duplication is unnecessary and wasteful
the MES does not occur until very high output

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26
Q

what happens if natural monopolies have to produce where ATC > AR

A

they will make a loss which will require a subsidy of the same amount

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27
Q

would authorities allow natural monopolies to produce at MC = MR

A

no, they would make them produce MC = AR, the point of allocative efficiency

28
Q

how do you show producer and consumer surplus on a diagram

A

consumer is above price line, producer is the area beneath

29
Q

what is consumer surplus

A

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)

30
Q

dead weight loss d

A

reduction in consumer and producer surplus when output is restricted to less than optimum level

31
Q

why will monopolies not produce beyond MR = MC

A

because producing extra units adds more to costs than revenue so would reduce monopoly profit

32
Q

why are monopolies not economically efficient

A

because they are neither productively or allocatively efficient

33
Q

how do you show dead-weight loss on a diagram

A

the triangle between where S (MC) = D (AR) and where MC = MR and the price at that point on AR

34
Q

what shape are the producer and consumer surpluses

A

triangles

35
Q

what shape are the producer and consumer surpluses in monopoly

A

consumer is triangle, producer is quadrilateral

36
Q

how can a monopoly being dynamically efficient benefit consumers

A

by creating a new lower marginal cost curve they can reduce prices and improve the product

37
Q

how does the MES relate to monopolies

A

many small firms competing will not reach MES, if there was a monopoly it would which would reduce costs for consumers

38
Q

how could allowing monopolies in order to reach the MES benefit the UK

A

it will be more competitive with foreign firms

39
Q

who was it who argued that monopolies were responsible for economic progress through R&D

A

Joseph Schumpeter

40
Q

explain how monopolies and oligopolies are related to innovation and growth

A

short-run profits are used in R&D to innovate which leads to growth

41
Q

what did Joseph Schumpeter argue

A

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

42
Q

price discrimination d

A

where an identical good / service is sold to different customers at different prices for reasons not associated with costs

43
Q

how can monopolies appropriate more of the consumer surplus

A

by indulging in price discrimination

44
Q

what are the conditions necessary for price discrimination

A

no other firm can sell it at a lower price
resale is prevented
there are different elasticities of demand

45
Q

explain condition for price discrimination that no other firm can sell at a lower price

A

the vendor controls what is offered and there are no other firms that can sell the product at a lower price

46
Q

explain condition for price discrimination that resale is prevented

A

traders cannot buy in the cheaper market and sell in the dearer

47
Q

explain conditions for price discrimination that there are different elasticities of demand

A

some buyers are prepared to pay more than others

48
Q

what are the three methods of price discrimination

A

geographical
by time
age of customer

49
Q

example of price discrimination by geographical

A

car companies increase price of car in UK compared to Europe

50
Q

example of price discrimination by time

A

train companies charge higher prices at peak times

51
Q

in the case of passengers on trains price ___ ___ ___ changes with time

A

elasticity of demand

52
Q

example of price discrimination by age of customer

A

adult, pensioner and child are charged different prices to travel on trains, theatre etc.

53
Q

first degree price discrimination d

A

when the discriminating firm can charge a separate price to each individual customer

54
Q

what does first degree price discrimination require

A

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

55
Q

second degree price discrimination d

A

when the discriminating firm can charge a separate price to different groups of customer

56
Q

how do you show second degree price discrimination on a diagram

A

normal demand curve but different prices for different blocks of customers

57
Q

third degree price discrimination d

A

when the discriminating firm can charge a different price in each country

58
Q

how does the third degree price discrimination work

A

different markets have different elasticities of demand so the firms will produce where MC = MR in each individual market

59
Q

what are the advantages of price discrimination for the discriminator

A

increased profits redistribute income to producers, higher level of total reserve, output larger

60
Q

explain advantage of price discriminations that the output will be larger

A

with single price increases in output lead to fall in MR but discriminator can sell more without lowering the price

61
Q

what are the effects on consumers of price discrimination

A

loss of welfare, inequitable, possible long term benefits, lower prices may make more affordable

62
Q

explain effect of price discrimination loss of welfare

A

consumers’ surplus totally disappears under first degree price discrimination

63
Q

explain effect of price discrimination inequitable

A

some consumers have to pay more than others

64
Q

explain effect of price discrimination long term benefits

A

if profits are reinvested, consumers may derive long-run benefits such as lower prices

65
Q

explain effect of price discrimination about lower prices

A

lower prices may mean poorer consumers may be able to afford the product

Economics Unit 3 (10 decks)

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