Monopoly Flashcards
What are the characteristics of a monopoly?
- Single seller
- Unique products (with no/few substitutes)
- High barriers to entry
- Firms are price makers - they can set the market price though are constrained by demand - a higher price means a lower quantity demanded. Demand slopes downwards to the right D = AR, but MR is
twice as steep because to sell more the firm has to reduce the price - Supernormal profit can be earned in the long because barriers to entry are high
Show and explain a monopoly in the short run.
Assuming profit-maximisation, the firm will produce the output Q where MC=MR. It can charge price P according to the demand curve. At Q, AR is greater than AC, so profit per unit is AB. Total supernormal profit is the shaded area ABCP
When are there minimum losses in the short run in a monopoly?
If the monopolist faced higher costs, so AC>AR at the output where MC=MR, then the firm is making losses.
* The firm will shut down if its revenue does not cover its variable costs (if AR< AVC) in the short run.
* The firm will stay open in the short run if AR>AVC
Explain monopolies in the long run
In the long run, because there are high barriers to entry, no new firms can join the market so the monopolist can earn the supernormal profits in the long run.
The diagram for the long run is the same as for the short run.
If the firm had been making losses in the short run, it would have to shut down in the long run unless demand increases (boosting revenue) or the firm is able to cut its costs.
What is monopoly power?
In theory, there is one supplier in a monopoly, but a firm that has more than 25% of a market can wield monopoly power
What is a natural monopoly?
a single firm can efficiently serve the entire market due to significant economies of scale e.g. utilities, transportation networks
* High fixed costs relative to variable costs and declining average costs
* High minimum efficient scale
How can natural monopolies benefit consumers, and what regulatory measure is often necessary to prevent potential abuse of market power?
Natural monopolies can benefit consumers by providing services at lower costs than multiple competing firms would achieve, but they require regulation to prevent potential abuse of market power.
Is a monopoly allocatively efficient (P=MC)?
a monopoly is NOT allocatively efficient in either the short nor long run; P>MC
Is a monopoly productively efficient (min LRAC)?
the monopoly is NOT productively efficient – it produces to the left of the minimum AC
Is a monopoly dynamically efficient?
the monopoly has supernormal profits it can reinvest in the business – it can use the profits for R&D and product and process innovation. The monopoly can therefore be dynamically efficient.
A monopoly that does not innovate may lose its market dominance and the barriers to entry in the market may weaken
