Monopoly + Monopolistic competition + Perfect competition Flashcards
What is the definition of a monopoly?
A market structure where one firm supplies all the output in the industry without facing competition because of high barriers to entry to the industry
What are the characteristics of a monopoly?
- no close subsidies
- high barriers to entry and exit
- price MAKER
What does a monopoly graph look like assuming supernormal profits?
What signal is sent?
AR curve is above than AC curve
Signal to other firms to enter the market but they can’t because of high barriers to entry
See page 27
What does a monopoly graph look like assuming subnormal profits?
What signal is sent to other firms?
AC curve is above AR curve
Leave the market but they can’t because of high barriers to exit
See page 27
What does a monopoly graph look like assuming normal profits?
What signal is sent to firms?
AC curve and AR curve touching
Stay, but firms are indifferent
See page 27
What is allocative efficiency? Are monopolies allocatively efficient?
Producing where MC = AR
Monopolies are NOT allocatively efficient as price > MC
What is productive efficiency? Are monopolies productively efficient?
Producing at the lowest point on the AC curve
NO monopolies forego economies of scale to produce at a higher price
What is dynamic efficiency? Are monopolies dynamically efficient?
Refers to a firm becoming more efficient overtime, requires reinvesting LR supernormal profits into new technology and processes
YES, monopolies can reinvest because LR supernormal profits persist over a long time
What is x-inefficiency? Are monopolies x-inefficient?
Occurs when a monopolist has little incentive to control costs due to large profits being earned due to high barriers to entry/exit and lack of competition, sources are: waste, overpaying workers/managers and paying more than necessary for materials/stock
YES monopolies produce beyond minimum point of the AC curve
What are the COSTS of monopoly?
- Loss of economic efficiency - allocatively inefficient because Pm/Qm > Pc/Qc, monopolies restrict output to raise prices to maximise profits
- Redistributive effect - monopoly profit distributed to shareholders who are likely to be a higher income household than consumers
- Less consumer choice - forced to buy from this producer due to lack of competition
What are the BENEFITS of monopoly?
- Possible improvement in dynamic efficiency - supernormal profits in the LR could lead to faster rate of technological change
- Global competition - Firms may have financial resources to match large overseas competitors
- Economies of scale - Monopolies may be able to exploit economies of scale to lower costs
- Cross subsidisation - Monopolies can fund a loss from one product by raising the prices of another
What is a natural monopoly?
A market where one firm is unable to fully exploit economies of scale, due to very high fixed costs
What happens on the diagram when there is an increase/decrease in demand?
AR and MR curve will shift left for decrease
AR and MR curve will shift right for increase
What happens on the graph when there is an increase/decrease in fixed costs?
AC curve will shift up for an increase
AC curve will shift down for a decrease
What will happen on the graph when there is an increase/decrease in variable costs?
MC and AC curve will shift down for decrease
MC and AC curve will shift up for increase
What are the characteristics of monopolistic competition?
- many buyers and sellers
- slightly differentiated good
- price makers
- low barriers to entry and exit
- good info
- non-price competition
- firms are profit maximisers
What are the conclusion for monopolistic competition?
In LR = allocatively inefficient
In LR = productively inefficient
In LR = dynamically inefficient (subnormal profits) LEARN DIAGRAMS
What the types of barriers to entry?
- economies of scale
- absolute cost advantages
- product differentiation advantages
- capital requirements
What are sunk costs and reputational damage?
Sunk costs - Costs incurred by a firm that is cannot recover should it leave the market:
- losses from selling assets
- machinery etc
Reputational damage - Loss of faith in the brand and the management team
What are the perfect competition characteristics?
- large number of buyers and sellers
- freedom entry/exit
- homogenous goods
- no transport costs
What are perfect competition examples?
- foreign exchange market
- agricultural markets
Perfect competitors are price…?
Price TAKERS
Firms are small and sell the same product, they must therefore accept the going rate which is determined by the forces of demand and supply in the industry
