19 Monopoly

Question 1

monopoly

Answer 1

situation in where there is a single seller in a market with no competitors

Question 2

conditions of a monopoly

Answer 2

• a single seller in a market
• barriers to entry - cant compete in a monopoly market
• barriers to exit - difficult to exit the market without making a loss
• price maker - can choose the price in the market and is likely to choose a price higher than a competitive market
• no close substitutes - nature means that it is difficult for customers to substitute the product for anything else
• supernormal profit - in both short run and long run

Question 3

dynamic efficiency

Answer 3

incentive to innovate products and processes to become productively efficient in the long run
- in perfectly competitive market there is little incentive to innovate because other firms can adopt the innovation quickly
- in a monopoly the barriers to keep new entrants out the firms can innovate and gain supernormal profits in the long run

Question 4

X-inefficiency

Answer 4

lack of incentive to reduce costs
- under perfect competition every firm needs to keep its costs as low as possible to be able to sell at lowest possible price
- monopoly does not have this pressure and won’t look to keep costs as low as possible

Question 5

advantages of a monopoly

Answer 5

• can be dynamically efficient - more profit more innovation
• gain economies of scale reducing average costs
• may be able to compete internationally
• supernormal profits can be reinvested creating more jobs and new products
• potential of becoming a monopoly may incentivise a firm to be more successful
• can avoid duplication of effort - inefficient to run two rail companies

Question 6

disadvantages of a monopoly

Answer 6

• high prices for consumers
• X-inefficiency leading to higher average costs
• less incentive to innovate due to a lack of competition
• a monopoly can be so large that it suffers from diseconomies of scale
• less choice for consumers
• allocatively inefficient
• productively inefficient

Question 7

Natural monopoly

Answer 7

type of monopoly in which there are large economies of scale to be gained to the point where only one firm is viable
- long run marginal cost curve remains below the long run average cost curve

Question 8

advantages and disadvantages of a natural monopoly

Answer 8

same as a monopoly
- advantage of economies of scale is so great that it may be logical for government to allow monopoly to exist
- government may need to step in and regulate the market