Monopoly

Question 1

What is a monopoly?

Answer 1

Monopoly- sole suppler of 🚘 or 🧹- firm able to set prices to max profits

Question 2

What are the characteristics of a monopoly?

Answer 2

Number of firms- 1
Type of product- Unique
Knowledge- imperfect- rival firms ✖️ know pricing and output strategy
Barriers to entry/exit- very ⬆️
Price setting powers- price maker

Question 3

What are ALL monopolies assumed to be like firms in perfect competition?

Answer 3

Profit maximisers

Question 4

Describe the graph which shows how supernormal profits are made by a monopoly?

Answer 4

Draw MC, AC, MR, AR curves normally (with AC starting above MC but after intersection goes under)
Firm producers at profit maximising equilibrium (MC=MR)
At point where MC=MR- quantity vertically ⬇️ AND price found by moving ⬆️ vertically to AR (demand) curve and then moving horizontally ⬅️
From that point on AR move vertically ⬇️ until AC curve and then move horizontally ⬅️ to create box of supernormal profits (profits above costs)
Y-axis = revenue/costs
X-axis = quantity
SEE BOTTOM OF PAGE 33 THEME 3 BOOK

Question 5

Describe the graph which shows how losses are made by a monopoly?

Answer 5

Draw MC, AC, MR, AR curves (with AC starting above MC and after intersection under MC BUT with AC above both AR AND MR curves AND with MC steeper than usual)
Firm producers at profit maximising equilibrium (MC=MR)
At point where MC=MR- quantity vertically ⬇️ AND price found by moving ⬆️ vertically to AR (demand) curve and then moving horizontally ⬅️
From that point on AR move vertically ⬆️ until AC curve and then move horizontally ⬅️ to create box of loss (costs above profits)
Y-axis = revenue/costs
X-axis = quantity
SEE PAGE 5 OF THEME 3 LS 10 MONOPOLY

Question 7

How does a monopoly compare with firms under perfect competition?

Answer 7

1) Both profit maximisers
2) Firm in perfect competition allocatively (welfare maximised- P=MC) AND productively (produce at lowest average cost) efficient BUT monopoly NEITHER
3) Prices set higher by monopoly than firm in perfect competition
4) Quantity produced lower under monopoly and higher by firm in perfect competition

Question 8

What are the advantages of a monopoly? COMPLETE

Answer 8

1) Supernormal profits-> investment (maintain competitive edge), funds for R and D
2) Firms can match large overseas competitors- have financial 💵 power
3) cross-subdisation->
4)
5)

Question 9

What are the disadvantages of a monopoly?

Answer 9

1)
2)
3)
4)
5)