Topic 5B, Topic 6 and Topic 7 (Supply Demand) Flashcards
What is the definition of a Monopoly?
A Monopoly is when one firm dominates the market.
What is a Natural Monopoly?
This is when one firm is able to supply a whole market.
What is a Legal Monopoly?
This is when a firm has more than 25% of the market.
What is a Price Maker?
This is when a dominant firm is able to set a price to the whole industry.
When will Monopolys only exist? and why?
When there is a high barrier to entry. ( hard to start up a business in a firm ). This is because it can drive out competition by restricting market supply to force price up meaning that starting businesses will run bankrupt.
Disadvantages of Monopolies?
.High Prices and lowe output because of lack of competition
.Choice may be restricted
.Level of Customer service may be lower
.Product quality may be poorer
.Production costs may be higher as there is no point being efficient.
Advantages of Monopolies?
.Lower avg. Costs of production due to internal economies of scale. Therefore Prices may be lower
.Possibly more innovation through a higher level of spending on research and development since the business knows it can sell what it produces.
How do Monopolies keep their Power (High barriers to entry) naturally?
.EoS
.High Set up Costs
.Legal Barriers-e.g. Patents and copyrights, gov. licenses
(It can be expensive to develop new production methods and products, so granting patents and copyrights encourages firms to invest in developing new methods without fear that competing firms will copy their ideas and lower their profits)
.Marketing Barriers
How do Monopolies keep their power artificially?
.Forwards/Backwards Vertical Integration
(Tie up Supply Chain which raises the demand and therefore prices of the products which means that new firms will not be able to make profits)
.Predatory Pricing
(Occurs when large firms cut prices, even if this means losing money in the short, this allows more attraction to the firm)
.Exclusive Dealing
(If a monopolist supplies products to companies that are producing substitute products then it will threaten to stop supplying.
Cartels (Firms work together in order to achieve market power (e.g. to limit output and increases price)
Are Monopolies good for their consumers?
Depends if profit is then used to benefit customers in quality
Depends if the Government intervenes in customer exploitation (Creating Competition, Price Caps, Profit Caps, Breaking it up, Fines)
Depends on what is more important to consumers, Higher Quality or lower prices
Definition of Oligopoly?
An Oligopoly is when a few firms dominate the market.
Characteristics of Oligopolies?
High Barriers to Entry
Large Market Share
Non-Price Competition-Avoid Price Wars due to less profit.
Instead, they try to differentiate their products in terms of features, service, quality style etc:
Price competition- There is typically Market Stability until Market leader sets a price and other firms follow. This is usually to avoid price wars
EoS- Large firms in the economy will benefit from EoS because they are large scale producers. As an oligopolies output increases their average cost decreases. This helps them to increase Profits. Smaller firms cannot exploit EoS and will compete with non-price competitiion
What is Collusion?
When firms agree to stop competing and either raise prices or reduce output in order to increase their profits
Characteristics of collusion?
Customer Exploitation
High barriers to Entry
Dominant Firms Leadership-As group of cartels will follow
Problems of Collusion?
Illegal
Break Down- Firms in collusion are always cutting prices and increasing market share (Diseconomies of Scale)
