Monopoly Flashcards
Define pure monopoly
A pure monopolist is a single supplier that dominates the entire market
What are the features of a monopoly?
Only one firm
Complete barriers to entry prevent exist and entry of firms
Short run profit maximiser
Firm is a price maker
Define price maker
When a firm has the power to influence the price that they charge
Why can monopolies be price takers
Price inelastic in demand-No substitutes
Where do monopolies produce?
MC=MR
SRPM
Are monopolies allocatively efficient?
No
They don’t produce enough and there is no incentive too
Are monopolies productively efficient?
No
Don’t produce on the lowest part of the AC curve due to SRPM and also because there is no incentive to control costs it leads to X-Inefficiency
What effect will a tax on every good have on a monopolies costs?
AC will shift up and as a result so will MC
What effect will a tax on one good have on a monopolies costs?
AC will shift up but MC will remain the same as it is not an addition but only at one point
What are advantages to monopolies?
Benefit from EoS
Can pass on savings to customers as they lower prices
Means for innovation (dynamic efficiency)
Internationally competitive
Makes sense in the case of a natural monopoly
What are disadvantages of a monopoly?
Misallocation of resources Supply is restricted Expensive prices Underconsumption of the good Loss of consimer welfare/surplus Inequality Statically inefficient May satisfice rather than maximise profit X-inefficient
Define X-Ineffiency
When a firm lacks the incentive to control costs
What does X-ineffiency lead to?
A rise in AC
What is the difference between a pure and a natural monopoly?
In a natural monopoly there will always be economies of scale.
Competition with Natural monpolies
Not desireable
Leads to a wasteful duplication of resources because firms who aren’t the first firm can’t exploit EoS to the same extent and will just get driven out the market
There infrastructure etc will go to waste
