Monopoly Flashcards
What are the assumptions to the monopoly market structure model
There is a single seller of a good
There are no substitutes for the good, either actual or potential
There are barriers to entry into and exit from the market
Firms aim to maximise profits
What is the demand curve in a monopoly
Slopes downwards
For the monopolist - demand curve shows average revenue
Does a monopolist have influence over price
Yes - can make decisions regarding price and output
Does not have complete freedom to set price - still constrained by market demand
What is PED for a monopoly demand curve
Elastic above the midpoint of the demand curve
Inelastic in the lower half
Unit elastic directly at the midpoint
Relationship between MR and AR in a Monopoly
MR is twice as steep as AR
What does a monopoly aim to do
Maximise profits
Where will a monopoly always produce
In the segment of the demand curve where MR is positive - implies that demand is price elastic
Allows monopolists to make supernormal profits
Why is barriers to entry an important assumption in regards to profit maximisation for firms
Prevents new firms from entering the market and taking away any supernormal profit
What does the size of profit depends on
Relative position of the market demand curve and the position of the cost curves
Where does a monopoly try to maximise profits
Output at which MR = MC
What happens when demand curve shifts to the right and what does the monopoly choose to do afterwards
MR curve will also shift - it has a fixed relationship with the demand curve
Produce at MR =MC after the shift, sets a higher price, making higher profits
What occurs in a perfect labour market
There are no barriers to the supply of labour to any region or any occupation - workers can move freely from one job to another in different regions and in different occupations
Describe the Geographic Immobility of Labour
Causes problems for the labour market if available jobs and available workers are not located in the same area
Social costs - people do not want to move away from their friends and relatives or leave their area - parents may not wish to disrupt their children’s education
High rate owner occupied housing in the UK means owner-occupies may need a strong inducement to move to another part of the country
Council house tenants may find it difficult as they return to the bottom of the waiting list for housing
Difference in house prices across the country
Information problem may occur as labour may be unfamiliar of companies in different areas
What has happened to international mobility of labour in recent years
Has increased - especially since the expansion of the EU in 2004
Single Market measures of 1992 allowed free movement of people, goods, services and capital within the EU
Wage differential acted as an incentive for workers to move to the UK
Describe the Occupational Immobility of Labour
Difficulty people face in moving between occupations
May result in structural unemployment
It’s expected that as the pattern of consumer demand will change - will the pattern of economic activity
It is important that some sectors of the economy decline to enable others to expand
Costs are involved for workers switching between occupations
Firms are expected to underprovide training - due to the free rider problem
May be a need for government intervention to ensure training is provided to combat structural unemployment and to facilitate occupational mobility
Workers may not have enough information to enable them to judge the benefits from occupational mobility - does not apply to workers displaced by structural change in the economy
