Pros and Cons of Market Structures Flashcards
Where do monopolies produce at and what effect does it have for consumers?
Monopolies produce at the profit max or profit maximising or profit maximisation point, which leads to a loss in consumer surplus
Where do firms in perfect competition produce at and what effect does it have for consumers?
Firms in perfect competition produce at allocative efficiency, which means that consumer surplus is maximised . As a result, consumers are worse off in monopolies .
As monopolies produce at the profit maximisation point, consumers suffer due to a loss of…
Consumer surplus
Pros of Monopolies for consumers
Monopolies can produce cheap, high quality goods because they can reinvest supernormal profits and access economies of scale
How does dynamic efficiency affect the market position of a monopoly?
Dynamic efficiency enables firms to drive down prices and keep new firms from joining the market. As a result, reinvesting large profits can lead to a strengthening of a firm’s monopoly position.
A monopoly position is advantageous for firms because it allows it to make…
S u p e r n o r m a l p r o f i t
Cons of monopolies for firms
Monopolies can exploit their position to drive competitors out of the market. However, this may lead to complacency and an increase in x-inefficiency . As a result, firms’ costs may rise . This in turn could lead to higher prices and the potential loss of the firm’s monopoly position.
When it comes to price, monopolies are price
When it comes to price, monopolies are price makers
What happens to small firms that work with monopolies
Firms can suffer disadvantages when they supply a monopoly firm because monopolies are the only buyer of these firms’ goods. As a result of this monopsony position, monopolies are able to set very low prices. Therefore, many small firms will suffer losses and be driven out of the market.
Explain why consumers may be better off in a market controlled by a monopoly firm…
Consumers lose out Monopolies achieve large supernormal profits. They can use this to invest in their capital and achieve dynamic efficiency, lowering their costs. In addition, monopolies are large enough to access economies of scale. This process will also lower average costs in the long run. Therefore, firms may be able to reduce their prices and provide consumers with lower cost, higher quality products than firms would be able to provide in a competitive market.
What is the main advantage that firms enjoy from a monopoly position?
Supernormal profit
What process may lead a firm with a strong monopoly position to become vulnerable to competitors?
Firms may become complacent and allow x-inefficiency to creep in. As a result, they may become vulnerable to price competition from other firms.
Small firms and monopolies
Many firms lose out when monopolies are the only buyer of their goods. Monopolies are price makers and can therefore drive prices downwards. As a result, monopolies can operate as monopsony firms in the market.
In perfect competition, firms are allocatively efficient which means that what is maximised…
Consumer surplus.
What happens with efficiency in perfect competition
Firms are able to achieve static efficiency. This means that they achieve both allocative and productive efficiency.
In the long run, firms in perfect competition are allocatively efficient, because they produce at the point at marginal cost which is equal to price. They are also productively efficient, which means that they produce at the bottom of the average cost curve.
