Monopoly Flashcards
Price Maker
firm with the ability to raise its price without losing all its customers.
Monopoly Market
- The presence of a single supplier of the good or service (very high concentration). This firm is referred to as the monopoly or monopolist.
- Product variety is not an issue in a monopoly market as there is a single supplier with a single product.
- The firm effectively sets its own price through the quantity it produces (price maker).
- The incumbent firm is protected from competition by high barriers to entry.
Inverse Demand
The maximum price that consumers are willing to pay for a given quantity of a product under a given set of conditions.
Profit Maximising
MR = MC
Monopoly in the Short-Run
In the short-run the monopoly cannot avoids its sunk costs and therefore if the monopoly price lies between average total and average variable costs the monopoly produces to minimise its loss.
The monopoly will shut down if average variable costs exceed the monopoly price.
Monopoly in the Long-Run
The monopoly is protected from competition in the short-run and long-run.
A monopoly that enjoys a profit in the short-run can maintain that profit indefinitely. Monopolies are only vulnerable to decreasing demand and increasing production cost.
Efficiency in Monopoly
An unregulated monopoly never achieves allocative efficiency and will not typically produce at the lowest point on its average total cost curve.
A profit maximising monopoly will always select a quantity that is less than the optimal (allocative efficient) quantity.
Barriers to Entry
Monopoly profits are not competed away in the long-run as rival firms cannot enter the market.
Barriers to entry can result from legal, technical or strategic factors in the market.
Natural Monopoly
A market in which any given quantity demanded can be produced at a lower the average cost by a single firm than by two or more firms.
Natural monopolies are characterised substantial economies of scales (decreasing average total cost) and limited demand.
