Monopoly Flashcards
What are the main features of a perfectly competitive market?
Lots of firms.
Easy to enter / exit.
Homogenous.
Perfect info.
Firms are price takers.
Why are profits likely to be lower in a competitive market?
There are lots of firms so each firm has a small market share. They have low monopoly power. If a profit is made, new firms can easily enter. This means the average price falls so profit falls.
Pure monopoly
When one firm dominated the market
Monopoly power
The potential firms have to have monopoly power (25% market share).
What factors influence monopoly power?
Barriers to entry.
The number of competitors.
Advertising.
Degree of product differentiation.
Concentration ratio
Combined market share
How can a monopoly lead to a misallocation of resources?
Firms don’t have an incentive to be allocatively efficient as they face no competition. This means they increase prices, leading to insufficient amounts of resources supplied = market failure.
What happens when a monopolist raises the market price above the competitive level?
Output will fall
Name 2 benefits of a monopoly
Economies of scale - where increasing output leads to lower costs of production.
Innovation - firms make lots of profit so can invest in research and development, leading to innovation.
What will competition lead to?
Firms striving to improve products , reduce costs, improve the quality of service provided.
State provision
When the govt provides resources in a market
Adv of state provision
All social benefits considered.
Not a misallocation of resources.
Disadv of state provision
Opportunity cost.
Wasteful.
Ignores private sector.
Regulation
Laws used to control actions of economic agents
Adv of regulation
Solves issues, allocatively efficient, welfare gain
