Week 8 Flashcards
What are the characteristics / typical assumptions of a monopoly?
One firm.
The firm sells a unique / differentiated product.
There are high barriers to entry.
Monopolists are “price makers”; they have “market power” to set P>MC
What are the possible causes of barriers in a monopoly market?
Ownership of some key resource.
Economies of scale – costs of production making a single producer more efficient than a large number of consumers – known as a natural monopoly.
Patents or copyright laws.
How can firms grow?
Many firms grow by mergers/acquisitions, although there’s competition policy to restrict this.
What are the differences between monopolies and perfectly competitive firms?
The key difference between a perfectly competitive firm and a monopoly is the price setting power.
Monopolists face a downward-sloping demand curve compared to a horizontal curve for perfectly competitive firms.
Monopolists can make supernormal profits in the long run but PC firms can’t.
For a monopolist, AR doesn’t equal MR unlike PC firms where AR=MR=P.
What’s the profit maximising level of output?
The profit maximising level of output is MR=MC.
What’s the efficiency of a monopoly?
Monopolies may be productively inefficient.
They are allocatively inefficient.
It’s better than PC in terms of dynamic efficiency.
What’s strategic interdependance?
Strategic interdependence is where the outcome of one party depends not only on their own actions but also the expectations of others.
What are the assumptions of monopolistic competition?
A large number of small and insignificant firms.
Product differentiation.
Free entry and exit.
Complete information.
How do monopolistically competitive markets work in the short run?
In the short run, a monopolistically competitive market is rather like a monopoly.
Monopolistically competitive firms face downward sloping demand due to differentiated products.
Firms are profit maximisers and choose to produce where MR = MC.
How do monopolistically competitive markets work in the long run?
As firms can enter the market in response to profits and due to low barriers to entry, the demand (AR) curve for incumbent firms will shift to the left.
If losses are made in the short run, some firms will exit the industry, shifting the demand curve of the remaining firms to the right.
What are the pros of advertising?
Provides information to consumers.
Consumers having more complete information is pro-competitive.
What are the cons of advertising?
Consumers’ tastes may be manipulated.
The extent of differentiation may be exaggerated (misinformation).
What are private goods?
Most goods are private goods, which are excludable and rivalrous.
Excludable: people can’t consume them unless they pay for them.
Rivalrous: one person’s consumption stops another person from consuming the good.
What are public goods?
Public goods are non-excludable and non-rivalrous.
What market failures arise in markets for public goods?
Public goods cannot be provided through a market system and hence we have market failure (goods not being provided at all).
The free rider problem is a form of market failure, stating that people will benefit from a good/service without paying for it.
In presence of a free rider, a private market doesn’t produce an efficient outcome.
