3.4.5 - Monopoly

Question 1

Define monopoly

Answer 1

a market with a single seller of a good (100% of market share)

Question 2

Define barriers to entry

Answer 2

existence of high start up costs or other obstacles that prevents new competition from easily entering an industry/area of a business. These benefit incumbent firms bc it protects their revenue and profit

Question 3

What are the three assumptions of the monopoly model

Answer 3

• there is a single seller of a good
• no substitutes for the good (either actual or potential)
• there are high barriers to entry into and exit from the market
• all firms aim to profit maximise
• imperfect knowledge

Question 4

What is the closest example to a pure monopoly

Answer 4

-Google with 83% market share
- but pure monopolies rarely exist; in law, a legal monopoly is formed when a firm has more than 25% market share

Question 5

Examples of a legal monopoly

Answer 5

Tesco - with 28% market share

Question 6

What is the demand curve like for a monopoly

Answer 6

downward sloping - monopolist has some but not total complete freedom to set the price as the firm is still constrained by market demand - people will choose to buy it or not

Question 7

How do monopolies determine price and output

Answer 7

• monopolies aim to profit maximise therefore produce at the level of output where MC = MR
• identify a price at which the market is cleared for that level of output

Question 8

Why is demand always price elastic

Answer 8

monopolies always produce at a level of output where MR is positive therefore demand is elastic

Question 9

Why do monopolies earn long run supernormal profits

Answer 9

• In a monopoly market, the barriers to entry are total, so no new firms enter the market, and this supernormal profit is not competed away
• so this is the long run equilibrium position for a monopolist

Question 10

Curves you should know

Answer 10

– monopolist making supernormal profit
- monopolist facing an increase in demand (MR and D shift right)
- monopolist making a loss

Question 11

Define price discrimination

Answer 11

When a firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay, supplies extract all consumer surplus.

Question 12

Define natural monopoly

Answer 12

For a natural monopoly the long-run average cost curve falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available.

Question 13

Define second degree price discrimination

Answer 13

Businesses selling off packages of a product at surplus capacity at lower prices than the previously published/advertised price – also volume discounts for consumers

Question 14

Define bi-lateral monopoly

Answer 14

A bilateral monopoly/oligopoly is a situation where there is a single (or few) buyer(s) and seller(s) of a given product in a market

Question 15

Define rent-seeking behaviour

Answer 15

Behaviour by producers in a market that improves the welfare of one but at the
expense of another. A feature of monopoly and oligopoly.

Question 16

What efficiencies does a monopoly hit

Answer 16

• Allocative: NO bc P doesnt equal MC so low choice, low output and high price
• Productive: NO its not at minimum point of AC
• xefficiency : NO lack of comp mean no
  incentive to cut costs or waste
• dynamic efficiency
• YES bc SNP made in LR which can be reinvested

Question 17

diff between static and dynamic efficiency

Answer 17

static: focus on maximising output and minimising cotss using current resources and tech. the goal is pareto efficeicy where it is impossible to make one individiual better off eiyhouy making another worse off

dynamic: adpating and innovating to maintain efficiency in face of changing market condtions and tech and consumer tastes

Question 18

refer to pic of whiteboard to explain monopoly as a cause of market failure due to deadweight welfare loss

Answer 18

• consumer surplus B shifted to porducer surplus
• in essence, price exceeds mc so not alloc efficient and producers are overrewarded and consumers underconsumer the suply bc its restricted by price hence consumers do not consumer as much as they want