Monopoly Flashcards
Chapter 10
what are the characteristics of a monopoly?
- sole supplier in the industry
- controls either price or quantity supplied
- maximises profit
- barriers to entry
why can a firm in monopoly not control both, the price and the quantity supplied?
they can control the price they charge, but not the quantity the public will buy
or they may supply a certain quantity but it can’t make the public buy this quantity at the P they set.
.i.e. you have to lower your price to increase quantity
how do firms in monopoly maximize their profit?
produce where MC = MR and MC is rising faster then MR
they may earn SNP
give examples of monopolies in the Irish economy!
gardai
irish rail
aer lingus
what are the sources of monopoly power/ the barriers to entry into the industry?
- Legal/statutory monopoly
- Ownership of a Patent/Copyright
- Ownership of Raw Materials
- Economies of Scarce/Large Capital Investment
- Cartels/Collusion
- Mergers/Takeovers
- Brand Proliferation
how is the demand curve facing a monopolist?
normal downward sloping demand curve
inverse relationship between price and quantity demanded
D curve = AR curve
when Ar is reduced to sell more output Mr will be lower then AR.
where is the equilibrium of monopolists?
SPECS
SNP is earned ( AR is greater then AC)
Price/Output is at P1 and Q1
Equilibrium is at point E where MC=MR and MC is rising faster then MR
Costs are at point B , not at the minimum point of AC
Scarce Resources are wasted, as the company is not producing at the lowest point of AC
compare perfect competition and monopoly to each other!
EFFICIENCY
monopolist wastes scarce resources, perfectly competitive firms produce at the lowest point of AC
PRICE
m. charges a higher price
OUTPUT
monopolists produce a smaller output
PROFITS
m. may earn SNP as AR is greater then AC,
in p.c. NP is earned as AR = AC
DEMAND CURVE
m. face a downward sloping curve,
p. c. firms face a horizontal d curve
compare imperfect competition and monopoly !
- neither produces at the lowest point of AC (wasted scarce resources)
- both face a downward sloping demand curve
- P is greater then MC (more of the good could be produced)
- a monopolist may earn SNP in their long run and in their short run,
a imperfect competitive firm only in the short run
what are the advantages of monopoly as a market structure?
- may achieve economics of scale
- guaranteed supply of product/service
- secure employment
- reduced use of scarce resources
- potential for innovations/research and development
what are the disadvantages of monopoly as a market structure?
- Exloitation of consumers
- inefficient use of scarce resources
- the production of fewer goods at higher price than perfect competition
- less efficient/ innovative
define deregulation!
the removal of government controls from an industry or sector to allow for a free and efficient market place
e.g. the airline industry, the taxi industry and the supply of electricity.
how are consumers affected by deregulation of markets?
increased competition may lead to increase in supply, what causes prices to fall.
benefit from improved services, greater efficiency, wider choices
how are employees affected by deregulation of markets?
existing companies may lose business due to new, increased competition forcing redundancies.
benefit from renegotiations and competing on working conditions
some employees may join the new suppliers and view the change as an opportunity for advancement.
how does deregulation of markets affect profits?
existing businesses may lose costumers, their market share will fall, as will their profits.
these companies may find it difficult to adapt their business processes to the decrease in revenues and may consequently fail.
conversely, the existing company may be able to compete and expand its business, achieving economies of scale and higher profits.
how can state companies who are often cited as being inefficient achieve greater productivity?
- deregulation of their markets would force efficiency, leading to better services and decrease in operating costs.
2.appointing experienced entrepreneurs with proven business records onto state boards might bring a different attitude that would increase profits and eliminate wasteful practices - state trading organisations were not initially set up to maximise profits, so the intro. of a profit motive and performance-related remuneration may lead to better-functioning organizations.
4.allow strategic alliances
5.discontinue unprofitable services - privatise companies, to encourage cost reduction
…
what is privatisation ?
the sale of a state company to private owners.
e.g. Aer Lingus, Aircom
what is nationalisation ?
taking a company or assents in the private sector into public ownership by a government.
e.g. AIB
what are the pros and cons of privatisation ?
pros:
lower prices and better service, with the revenue from the sale benefiting government finances.
cons:
loss of non-profit-making services and the deterioration of standards
overseas buyers may become owners of previously owned national assets and control might go out of the state
what are advantages for consumers/for employees if a company is facing increased competition?
FOR CONSUMERS:
1. better quality of services
- more competitive prices
- increased choice/ availability of services
FOR EMPLOYEES:
1. more motivated workforce
- reward/incentive for innovation
- provision of extra services
- opportunities for settlement packages
what are disadvantages for consumers/ for employees if a company is facing increased competition?
FOR CONSUMERS:
1. loss of non-profit-making services
- disruption to supply of service
FOR EMPLOYEES:
1. loss of job/ reduced job security
- change of conditions of employment/ loss of benefits
- curtailment in pay/pension
