Unit 1 - 2

Question 1

What are monopolistic competition characteristics?

Answer 1

1. Large number of firms making similar products
2. Few or no barriers to entry
   3 Firms try to differentiate by branding, styling and design
3. Eg. Pubs, Hairdressers, Restaurants

Question 2

What are the types of monopolies that occur?

Answer 2

1. Pure Monopoly - only one producer
2. Legal Monopoly - Government have 25% of the market
3. Natural Monopoly - one firm is so large it has significant economies of scale meaning that it can sell their products at a much cheaper price than several others

Question 3

What are the characteristics of a Monopoly?

Answer 3

1. There is no competition - only one produced
2. Abnormal profits are gained - the profits are much higher than they would be if in another market with a different product
3. Many barriers to entry and exit
4. The producer can set the quantity supplied or the price - as of the price is set the demand curve will determine the quantity that can be sold

Question 4

What are the barriers to entry in a monopoly?

Answer 4

1. Whoever owns the natural resources, countries and businesses may have sole access to a resource = monopoly power
2. Ownership of outlets - if there is no way to distribute the product to customers there is no point in entering the market
3. Tariffs - to protect infant and domestic industries
4. Predatory pricing - firms may lower their prices and make losses in the short run in order to force smaller business out of business

Question 5

What are the barriers to exit in a monopoly?

Answer 5

1. Sunk costs - the costs that would be lost if a firm leaves an industry eg. money lost on drilling for coal mines
2. Long-term contracts - discourage firms from leaving an industry
3. Non-homogenous products - if producers are unique, reduces and limits competition

Question 6

What are advantages of monopolies?

Answer 6

1. Economies of scale - products can be produced at lower costs which means firms may then pass on this costs to consumers, although they may not
2. Encourages research and development as firm know that if they create a unique product that will be secure in the market eg. Gain patents
3. Wasteful competition is reduced - no duplication of capital equipment

Question 7

What are disadvantages of monopolies?

Answer 7

1. Due to a lack of competition, firms may see no need to reduce their prices or improve services
2. Smaller suppliers may be squeezed, they are normally the ones who innovate, large firms may restrict supplies in order to keep prices high

Question 8

What is monopolistic competition?

Answer 8

Contains elements of both monopolies and perfect competition