Monopoly Flashcards
LBCPP
Features of a Monopoly
- Lack of substitutes
- Barriers to entry
- Competition
- Price maker
- Profits
Only one firm produces a good without close substitutes.
Lack of substitutes
If new firms enter the industry, the monopolist will not have complete control over a firm on the supply.
Barriers to entry
Monopolist decides the price of the product.
Price Maker
Can maintain supernormal profits even in the long run
Profits
SER
Advantages of Monopoly
- Stability of Prices
- Economies of Scale
- Research and Development
There is only one firm that sets the market price.
Stability of Prices
Big scale productions lower the cost per unit of seller which may be passed on the consumer.
Economies of Scale
Customers may be getting a better quality product at a reduced price.
Research and Development
HPI
Disadvantages of Monopoly
- Higher prices
- Price discrimination
- Inferior goods and services
It leads to exploitation of consumers as they have no option but to buy it from the seller.
Higher prices
Monopolists can charge different prices on the same product for different consumers.
Price discrimination
Monopolists may produce these as they know the goods will sell.
Inferior goods and services
NLGPR
Types of Monopolies
- Natural
- Legal
- Government
- Patent
- Resource
These exist because the firm can provide the commodity at a lower cost per unit than potential entrants.
Natural Monopoly
Example of a Natural Monopoly
Electric Companies
These exist due to government legislation and protection.
Legal Monopoly
These are privately-owned companies that are granted a monopoly by the government.
Legal Monopoly
Example of a Legal Monopoly
Water service company
It’s a monopoly that’s owned and operated by the government.
Government Monopoly
What the difference between Legal Monopoly and Government Monopoly?
Legal Monopoly = private-owned
Government Monopoly = publicly owned
It’s the protection of an invention under patent laws.
Patent Monopoly
What’s the purpose of a patent monopoly?
To encourage research and development by ensuring a period of time over which the potential for monopoly exists.
What is the lifespan of a Patent Monopoly?
Limited; It’s temporary
It’s when a single firm has virtual control over an entire resource’s supply.
Resource Monopoly
EEPNG
Sources of Monopoly Power
- Exclusive control over important inputs
- Economies of Scales
- Patents
- Network economics
- Government licenses
Total Revenue ÷ Quantity
Average Revenue
It’s represented by the demand in the market.
Average Revenue
What is the monopolist’s demand curve?
Market Demand Curve
It’s the revenue earned by selling one more unit.
Marginal Revenue
In a monopoly, when can a firm sell more?
If it lowers prices
Why can a monopolist choose the level of output or price but not both?
Because monopoly has a negatively sloped demand curve
Does the marginal revenue curve has double the slope of the average revenue curve?
Yes.
It is the tendency of monopoly firms to restrict output to increase prices and earn economic profits.
Monopoly underproduction
It is measured by the price that customers are willing to pay for an additional output.
Marginal Social Benefit
It is the result of a monopoly underproduction.
Deadweight Loss
It is the inefficient allocation of resources.
Deadweight Loss
It would cause social welfare to decline because mutually beneficial trade activity would fall.
Deadweight Loss
Monopoly can result in a social loss if monopolist does not what?
Does not use cost-effective production methods
Under monopoly, marginal cost is what?
Less than the price charged at the profit-maximizing level
