EVALUATION OF MARKET STRUCTURES

Question 1

Advantages of a Monopoly

Answer 1

• Greater Opportunities for Economies of Scale which could bring down costs of production; could be passed onto consumers for lower prices
• High supernormal profits can used for Innovation and R&D to find new cost-efficient production methods OR to create higher quality and new products; Dynamic Efficiency

Question 2

Disadvantages of Monopoly

Answer 2

• Firms have price-setting power and will operate at the point of profit-max (MR = MC); quantity will be below point of Allocative Efficiency (AR=MC)
• Firms will not operate with price at minimum AC; Productive Inefficiency
• X-inefficiencies can rise due to lack of competition in market
• Monopoly outcomes can cause inequality due to high prices making goods harder to afford for low-income earners; especially bad in necessity markets

Question 3

Advantages of Perfect Competition

Answer 3

• Allocatively efficient as firms as resources are directly following consumer demand (P=MC)
  — Lower Prices for consumer, Better quality goods, More choice for consumers
• Less chance of consumer exploitation due to lack of supernormal profit
• X efficient
• Productively efficient in LR

Question 4

Evaluation of Monopoly

Answer 4

• Dynamic efficiency level will depend on how supernormal profits are used
• Potential DISeconomies of scale from increased production
• Depends on level of regulation from industry regulators
• Depends on the type of good/service; necessity? If not necessity, monopoly may be desirable for more innovation and R&D expenditure to improve quality (e.g. Technology)
• Competition/Threat of Competition?

Question 5

Disadvantages of Perfect Competition

Answer 5

• Lack of dynamic efficiency
• Inability to benefit from large economies of scale
• Potential for cost-cutting in dangerous in order to remain competitive in the market

Question 6

Evaluation of Perfect Competition

Answer 6

• Unrealistic assumptions; IRL firms have at least SOME price setting power, brand loyalty, information gaps, entry and exit barriers, Patents, control of intellectual property and key inputs)
• Depends where cost cutting is taking place
• Depends on the type of market; good for necessity markets but consumers may prefer the benefits of dynamic efficiency in other markets

Question 7

Features of a Monopoly

Answer 7

• 25%+ market share
• High barriers to entry and exit
• Price Makers
• Profit Maximisers