Natural Monopoly

Question 1

What is a natural monopoly

Answer 1

A natural monopoly is when it is rational to only have one large firm who supplies the market at a lower cost than multiple smaller firms

Question 2

What are the characteristics of a natural monopoly

Answer 2

• Huge fixed costs (start up costs)
• low marginal costs
• economies fo scale until the limit of market demand (acts as a barrier)

Question 3

What does a natural monopoly have a problem with

Answer 3

• allocative efficiency
  If a natural monopoly was to try and be allocatively efficient, it would make a loss as marginal cost is lower than average costs so they would be making a loss

Question 4

Draw a natural monopoly

Question 5

What happens if another firm enters the market in. A natural monopoly

Answer 5

Inefficient duplication of resources as due to the large economies of scale, the minimum efficient scale will not be reached which is inefficient

Question 6

What does the low marginal cost lead to

Answer 6

• as more people use the service -> as marginal costs are low -> average total costs are also falling which is bare sick economy of scale

Question 7

What is a competitive monopoly

Answer 7

A competitive monopoly is a monopoly which acquires monopoly status due to its market actions -> mergers and acquisitions as well as innovation of a new product

Question 8

What are the two types of barriers to entry

Answer 8

• natural barriers to entry
• strategic barriers to entry

Question 9

Give an example of strategic barriers to entry

Answer 9

• increasing the fixed costs of the industry -> High spending on advertisement and r&d which means new entrants need to spend money on advertising and brand loyalty
• predatory pricing -> charging very low to the point new entrants can’t even think about joining the market
• legal barriers such as patents and exclusive rights