Lecture 9 - Monopoly

Question 1

Pure Monopoly

Answer 1

• A monopolised market has a single seller
• The monopolist’s demand curve is the (downward sloping) market demand curve
• So the monopolist can alter the market price by adjusting its output level

Question 2

What causes monopolies?

Answer 2

• A patent
• Sole ownership of a resource
• Formation of a cartel
• Large economies of scale

Question 3

Marginal Revenue

Answer 3

Is the rate of change of revenue as the output level y increases

Question 4

Markup Pricing

Answer 4

Output price is the marginal cost of production plus a markup

Question 5

Pareto Efficient

Answer 5

A market is Pareto efficient if it achieves the maximum possible total gains to trade, otherwise a market is Pareto inefficient

Question 6

Deadweight loss

Answer 6

Measures the gains to trade not achieved by the market

Question 7

Natural Monopoly

Answer 7

A natural monopoly arises when the firm’s technology has economies of scale large enough for it to supply the whole market at a lower average total production cost than is possible with more than one firm in the market

Question 8

Entry deterrence by a natural monopoly

Answer 8

• A natural monopoly deters entry by threatening predatory pricing against an entrant
• A predatory price is a low price set by the incumbent firm when an entrant appears causing the entrant’s economic profits to be negative and inducing its exit
• Like any profit maximising monopolist, the natural monopolist causes a deadweight loss