Monopoly

Question 1

characteristics of a monopoly

Answer 1

there is only one firm but many buyers

there are prohibitive barriers to entry for potential entrants

resource mobility and market information may be influenced by the monopolist

the monopolist aims to maximise profits

there are no close substitutes for this product

Question 2

how monopolies occur

Answer 2

government blocks the entry of more than one firm into a market

one firm has control of a key resource material necessary to produce a good

there are important network externalities in supplying the good or service

economies of scale are so large that one firm has a natural monopoly

Question 3

monopoly revenue

Answer 3

because the monopolist supplies the entire market, the market demand curve is also the demand curve faced by the monopolist

a gain in revenue from selling more output

a loss of revenue from selling each unit at a lower price

Question 4

monopoly profit

Answer 4

cost curves for monopolist are the same as in perfect competition

profit-maximising rule is also the same

the amount of economic profit is also calculated in same way as perfect competition

Question 5

economic profit in the long run

Answer 5

because of barriers to entry, the distinction between the long and short run for a monopolist is not as relevant
- monopolists can enjoy positive economic profits indefinitely

monopolists are constrained by the demand for their product, as well as their costs