MONOPOLY Flashcards
What is a monopoly
A monopoly is where there is only one firm in the market.
What is a legal monopoly?
A firm is legally considered a monopoly when its market share is over 25%
What is a pure monopoly?
A pure monopoly is just one firm that controls the entire market. They have 100% market share
What is market share?
How much of the market the firms own.
What are the 3 assumptions that economists make when modelling a monopoly?
1)assume only one firm in the market
2)assume they are profit maximisers
3)assume theres high barriers to entry
What are the four types of barriers to entry?
1)legal barriers
2)Sunk costs
3)Economies of Scale
4) Brand loyalty
What are legal barriers?
Legal barriers include any patents, copyrights or trademarks that stop new firms from using the ideas from an incumbent firm.
What is an incumbent firm?
A firm already in the market
What are sunk costs?
Sunk costs is a barrier to entry as it deters new firms from entering the market as they know there are high costs of failure. The money cant be recovered if a firm leaves the market.
Example of a sunk cost
Advertising as you cannot recover the money spent on advertising.
What happens when there are high sunk costs?
Increases the cost of failure
Why would big firms use Internal economies of scale?
Big firms use internal economies of scale to reduce their long-run average costs.
What are the 6 types of internal economies of scale?
1)risk-bearing
2)managerial
3)financial
4)purchasing
5)technical
6)marketing
What is economies of scale
When an increase in output leads to a decrease in long run average cost
In a monopoly, where do firms maximise profits?
Where MC=MR
The monopoly diagram is the same as the…
Cost and revenue diagram
What are the four measures of efficiency?
1)productive efficiency
2)allocative efficiency
3)x-inefficient
4dynamic efficiency
What is productive efficiency?
When a good or service is produced at the lowest possible cost
When AC is at its lowest
And When MC=AC
What is allocative efficiency?
Allocative efficiency is when welfare is maximised
Where MC=AR (price)
What is x-inefficient
When a firm is producing above the AC curve for a given level of output
X-inefficiency happens when a lack of effective competition in an industry means that average costs are higher than they would be if the market was more contestable.
What is dynamic efficiency?
It is when all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to a decrease in long run average costs.SNP must be made in the long run.
the four measure of efficiency but in a monopoly.
1)Productively inefficient
2)Allocatively inefficient
3)Possibly dynamically inefficient(depending on how the CEO uses their supernormal profits)
4)x-inefficient
What is a natural monopoly?
A natural monopoly is when it is naturally the most efficient if only one firm is in the market.
Why may a monopoly be a natural monopoly, 2 reasons
If they have
1)high sunk costs
2)huge internal economies of scale
What is price discrimination?
When a firm charges different groups of consumers different prices but for the same good.
What are the 3 conditions that must be satisfied when price discriminating?
1) market power
2)information on consumer elasticities
3)limit reselling
Examples of monopolies
Microsoft:
OS ran on 90% of computers
Microsoft internet explorer was the only way to access the internet
