Monopoly and Efficiencies Flashcards
Definition
A monopoly exists when one firm is the sole supplier of the good or service. A legal Monopoly is a firm with 25% or more market share.
Determine Price
Monopolies produce at MR=MC, for its the condition for profit maximisation. They charge the price that will sell this output, in accordance with the demand curve.
Monopoly Profit
Price is above Total cost so supernormal profits are made.
Allocative Efficiency
Consumer valuation is equal to the economic cost. Occurs when Price=Marginal Cost. P>MC more should be produced. P
Productive Efficiency
Combination of capital and labour in the most effective way, minimising their ATC. Producing at an output that coincides with the lowest point of a firm.
EOS Definition
The benefits to a firm of operating at an increased scale of production leading to reductions in average total cost.
Characteristics
- High Barriers to entry
- Supernormal Profit
- Price makers
Supernormal Profit
Profit in excess of normal, after determining price, compare this to the lowest point of Average Total Cost curve, difference A/B shows supernormal profit.
Determine Quantity
Quantity is determined where Marginal Revenue is equal to Marginal Cost. They wouldn’t produce more than Q, as it would add more total cost than total revenue.
X-Efficiency
The need to be able to control the costs of the firm.
Natural Monopoly
Where it is most efficient to have one firm provide the good/service.
Minimum Efficient Scale
The lowest level of output at which full advantage can be taken of economies of scale.
MES Natural Monopoly
Only when the firm has exploited every EofS no more firms can enter the market, as there is the lowest MES.
Monopoly Allocative Efficient?
No - Price exceeds the marginal cost, at profit maximising output.
Monopoly Productively Efficient?
No doesn’t produce at the bottom of the ATC curve.
