pure monopoly

Question 1

links for monopoly

Answer 1

• a firm in a highly concentrated market may have a degree of price setting power
• over a differentiated or unique product
• monopolist produced where MC=MR and restricts output to QPM when doing so
• this is undesirable cos perfectly competitive market would see production at an allocatively efficient level where price = MC
• in a monopoly there are high barriers to entry
• monopolist can charge the highest price consumers are willing and able to pay at P1 where AR>AC and supernormal profits are made
• results in consumer surplus in the market

Question 2

natural monopoly

Answer 2

• in some industries there are exceptionally high FC so there can be a strong case of natural monopoly
• natural monopoly AC diminishes over a large range of output
• as very high FC are spread over increasing levels of output
• the monopolist continues to experience EOS and falling LRAC
• consumers are likely to be charged higher prices than a state owned or regulated natural monopoly
• shows how natural monopoly may be desirable market structure for some G+S
• however natural monopoly do not allocate resources perfectly. some enterprises may have layers of bureaucracy and private may prove difficult to regulate and could price gouge and extract economic rent

Question 3

first degree pd

Answer 3

• the firm is able to charge individual prices to individual consumers
• this is shown by the range of prices and quantities P7-Q7
• if successful the firm can extract all consumer surplus the lies beneath demand curve (A) and turn it into extra producer surplus
• producer surplus would equal the total surplus (A+B)
• no deadweight loss even tho not enough consumer surplus as it’s extracted
• loss of consumer surplus shows how first degree pd can lead to negative outcomes for consumers
• however this is impossible to achieve unless the firm perfectly knows every consumers preferences

Question 4

second degree pd

Answer 4

• involves charging different prices either for different groups of consumers or different prices depending on the quantity that has been purchased
• for an airline, at P1 the firm is only producing Q1 which is below full capacity
• to sell at extra capacity the firm would need to sell at P2 which covers MC
• in these type of industries FC of production are high and MC are smaller and predictable

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Question 5

3rd degree

Answer 5

• most frequently found form of PD and involves charging different prices for the same product in different segments of a market
• linked to consumers willingness and ability to pay for a good or service. prices charged my have no relation to cost of production
• suppose a firm has been separated into a peak market w price inelastic demand and off peak market with elastic demand
• a constant MC for supplying to each group of consumers. the firm aims to profit maximise by maximising price
• peak market firm would produce at MC=MR and charge P1 and in off peak MC=MR at P2
• this shows how off peak consumers monopoly power may not be problematic, especially if tickets are sold below cost

Question 6

Monopoly advantages

Answer 6

benefit from economies of scale
generates dynamic efficiency
Price discrimination to the poor

Question 7

Monopoly disadvantages

Answer 7

Charge higher prices to consumers
Productively and relatively inefficient
Exploitation of suppliers
Worse quality of products and lack of innovation