monopoly Flashcards
What is the primary characteristic of a monopoly?
One firm dominates the market.
What is a pure monopoly?
One firm with a hundred percent market share.
What is the legal definition of monopoly power?
A firm has more than 25 percent control of the market.
What type of products does a monopoly typically offer?
Differentiated or unique products.
What does it mean for a firm to be a price maker?
The firm can set prices above marginal cost.
What are high barriers to entry and exit?
Obstacles that prevent new firms from entering or exiting the market easily.
What is the outcome of high barriers to entry in a monopoly?
Supernormal profits can persist over time.
What is the relationship between marginal revenue (MR) and marginal cost (MC) for a monopolist?
A monopolist produces where MR equals MC.
At quantity q1, how does average revenue compare to average cost?
Average revenue is greater than average cost.
What does the vertical distance between average revenue and average cost represent?
Supernormal profit per unit.
How is total supernormal profit calculated for a monopolist?
Supernormal profit per unit multiplied by quantity q1.
What does allocative efficiency mean?
Price equals marginal cost.
True or False: A monopoly is allocatively efficient.
False.
What is the effect of a monopoly on consumer surplus?
Low consumer surplus due to high prices.
What is productive efficiency?
Producing at the minimum point of the average cost curve.
True or False: A monopolist is productively efficient.
False.
What is X inefficiency?
Producing beyond the average cost curve, allowing waste to occur.
What are potential reasons for X inefficiency in monopolies?
- Complacency due to lack of competition
- Difficulty in reducing waste
What is dynamic efficiency?
The potential for long-run supernormal profits to lead to reinvestment in innovation.
How can monopolists reinvest their supernormal profits?
- New technology
- Innovative products
- Research and development
- Capital investment
What is the overall impact of monopolies on market choice?
Low output and low choice for consumers.
What could be a long-term benefit of monopolies for consumers?
Potential for long-run investments leading to better products.
What does the term ‘supernormal profit’ refer to?
Profit exceeding the normal expected return.
