Monopoly vs Competition essays Flashcards
1
Q
What are the disadvantages of a monopoly
A
- Allocative inefficiency as P>MC so low consumer surplus, choice, quality, (show this with deadweight loss)
- Productively inefficient as they are not minimising AC so prices higher in long term for consumers
- X inefficiency causing high prices in long term
- Inequality in necessity markets as low-income can’t afford high prices
2
Q
What are the advantages of a monopoly
A
- Dynamic efficiency so consumers get new innovative products with higher quality and could mean lower prices and firms can drive rivals out of market and have lower costs
- Greater EoS than firms who are in competitive markets and productively efficient
- Regulated natural monopoly is better for allocative and productive efficiency
- The higher profits can be used to cross subsidise loss making goods and increase consumer choice
3
Q
How can a productively inefficient monopoly have lower prices and higher quantity than a productively efficient firm
A
- The monopoly is so much bigger that their productively inefficient point has greater EoS than a productively efficient point for a small firm
- This means MC curve could be far lower for a monopoly than a firm in a competitive market so price may be lower and quantity greater so more consumer surplus
(Draw this on diagram showing AR, MR and then MC for monopoly and MC for competitive) - Only applies to industries with high potential for economies of scale such as car manufacturers and supermarkets
4
Q
What are evaluation points for some of the pros and cons of a monopoly
A
- Monopolies might not invest supernormal profits in capital, they might give to shareholders as dividends, save, higher salaries, pay debts etc
- If the firm is too big they might have diseconomies of scale instead
- Objective of monopoly may not be profit max, could be something better for society
- Regulated monopoly reduces inefficiencies
- Price discrimination exaggerates negatives, especially allocative inefficiency and inequality
- Legal monopoly can still have strong competition or threat of competition which could prevent x inefficiency e.g. super market industry
- Depends on type of good or service e.g. monopoly is bad for necessity but could be good for a luxury good due to the dynamic efficiency
5
Q
What are the advantages of a competitive market
A
- Have to be allocatively efficient to survive meaning lower prices and higher quantity so higher consumer surplus, quality and choice in market
- Have to be productively efficient to survive, meaning they are maximising economies of scale and passing on lower costs to consumers
- Have to X efficient to survive, passing on lower costs to consumer
- High quantity means derived demand for labour is higher, creating jobs
6
Q
What are the disadvantages of a competitive market
A
- Lack of dynamic efficiency so less progress over time with innovation and tech in the market e.g. with perfect competition long run
- Smaller firm means less economies of scale so MC curve is higher than monopoly, could be higher price and lower quantity than monopoly
- Cost cutting in dangerous areas to be X efficient e.g. health and safety, wages, environment
- Constant creative destruction could lead to unemployment as firms get replaced
7
Q
What are evaluation points for the pros and cons of a competitive market
A
- Small scale dynamic efficiency still possible as firms have SR profit and may need to innovate to survive e.g. monopolistic competition
- Depends on level of EoS in industry whether monopoly could have advantage
- Competition is bad for natural monopoly
- Amount of regulation on health and safety in case firms are cutting costs
- Depends on type of good/service as we don’t want monopolies in necessity markets so we value static efficiency more than dynamic but we might value dynamic efficiency and innovation more for luxury goods where consumers are willing to pay more for the differentiation and variety
