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MS STONE ECONOMICS > Monopoly > Flashcards

Monopoly Flashcards

1
Q

What are the features of a monopoly?

A
  • only one firm
  • complete barriers prevent the entry and exits of firms
  • firm is a price maker
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2
Q

What are barriers to entry?

A

Artificial barriers
- fist mover advantage
- predatory pricing
- legislation
- product differentiation

  • high MES

Legal entry barriers
- market license
- patent protection
- state awarded franchises
- import controls

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3
Q

Where does Q occur in a monopoly?

A

MC=MR

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4
Q

Why are monopoly’s not productively efficient?

A

At Q, AC is not at its lowest

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5
Q

Why does a firm not have incentive to be productively efficient?

A

It decreases their supernormal profit

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6
Q

Why are firms not allocatively efficient?

A

Q doesn’t = P=MC
Monopoly’s can restrict supple and raise prices so they are allocatively inefficient

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7
Q

Why does dynamic efficiency not appeal to pure monopoly’s?

A

Gain less as there would be more spent on R&D

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8
Q

Where does revenue maximisation occur in a monopoly?

A

MR=0

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9
Q

What is x - inefficiency?

A

Organisational slack, occurs when a firm leads to the incentive to control costs. This causes average costs of production to be higher than necessary

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10
Q

Why does x inefficiency occur?

A
  • bonuses
  • expenses
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11
Q

Why can’t x inefficiency occur in a perfect comp market?

A

Leads to subnormal profit

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12
Q

Why is Q where it is in a monopoly?

A

We assume all firms are short run profit maximisers ( supernormal profit is at its largest)

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13
Q

Where are sales maximised on a monopoly diagram?

A

AC=AR

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14
Q

Why would a firm never produce above sales max level?

A

AC is higher than AR therefore subnormal profit is formed

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15
Q

What is dead weight loss?

A

Loss of welfare arising from a market failure/ misallocation of resources I.e. externalities or monopolies

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16
Q

What is Q competition?

A

If there were more firms in the market output would be greater, prices would be lower and there would be a greater welfare

17
Q

What is a natural monopoly?

A

Only room for one firm in a market to fully exploit the economies of scale that are available
- in fact the firm never fully exploits economies of scale
- these result from nationalisation

18
Q

What is nationalisation?

A

Process of taking private sector firms back into the public sector/ was always public ally used

19
Q

Why does consumer surplus decrease?

A

Decreases due to high price

20
Q

Why does producer surplus increase?

A

Due to high price

21
Q

Why is Q supernormal profit not a good choice for a state owned good?

A

Supernormal profit would be silly to do on a necessity

22
Q

What is regulatory capture?

A

A process by which regulatory agencies become dominated by the interests of those they were originally charged to regulate

23
Q

disadvantages of a monopoly to the firm?

A
  • Due to a lack of competition, there is a reduced incentive to be efficient
  • Monopolies lead to a misallocation of resources as P > MC. The price is above the opportunity cost of providing the goods
  • Due to a lack of competition, innovation sometimes lacks effectiveness
24
Q

advantages of a monopoly to the firm?

A
  • Supernormal profits generate money for continued investment in technology and product innovation
  • Market power enables the firm to increase its global competitiveness
  • Economies of scale can increase, thereby lowering the average cost
  • Producer surplus increases
  • Price discrimination can increase revenue
25
Q

disadvantages of a monopoly to consumers?

A
  • A lack of competition is likely to result in higher prices as no substitute goods are available
  • A lack of competition may result in no product innovation & worse product quality over time
  • May experience worse customer service as the incentive to improve it is limited
  • decrease in consumer surplus
26
Q

advantages of a monopoly to consumers?

A
  • Product innovation due to the firm’s supernormal profits may result in a better-quality product
27
Q

advantages of a monopoly to suppliers?

A
  • Increased sales volume for some suppliers as they are able to supply products that are distributed nationally or internationally
28
Q

disadvantages of a monopoly to suppliers?

A
  • There is less competition for their products and a monopoly often has the power to dictate what price they will pay to suppliers (monopsony power)
  • This price may not be profitable in the long run

MS STONE ECONOMICS (11 decks)

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