monopolies

Question 1

perfect competition

Answer 1

-many buyers and sellers (infinite)
-homogenous goods (identical)
-firms are price takers
-no barriers to entry/ exit
-perfect information
-firms are profit maximisers ( produce where MC =MR)

Question 2

LR in perfect competition

Answer 2

defined as where normal profit is being made, any profit outside normal profit is a short run equilibrium in perfect competition

Question 3

SR in perfect competition
supernormal profit

Answer 3

SR position for firms is not going to last in the long run
this profit will attract new firms to enter the market with no barriers to entry and perfect info etc.
as they enter, supply shifts right, price falls and this keeps happening until there is no incentive to enter the market (i.e. no supernormal profit and only normal profit is left)

Question 4

SR in perfect competition
subnormal profit

Answer 4

firms will be incentived to leave the market and to produce their opportunity cost instead and can leave the market with no barriers to exit
as they leave supply shifts left, increasing price, this keeps happening until there is no incentive to leave and normal profit is left

Question 5

LR for perfect competition
Efficiency

Answer 5

-Allocative efficiency
-productive efficiency
-x efficiency

statically efficient NOT dynamically efficient

Question 6

shut down condition

Answer 6

AR = AVC (condition if loss if shutdown = loss if continue)

AR < AVC - definetely shutdown

Question 7

break-even condition

Answer 7

AR = AC, normal profit

if AR > AVC continue for now

Question 8

pure monopoly

Answer 8

one firm with 100% market share

Question 9

monopoly power

Answer 9

one firm has around 25% market share (legal monopoly)

Question 10

monopoly

Answer 10

-one seller dominating the market
-differential products - firm is a pprice maker
-high barriers to entry/ exit
-imperfect information
-firm is a profit maximiser, mr = mc

Question 11

monopoly efficiencies
allocative efficiency

Answer 11

-NOT allocatively efficient as they are charging a price greater than MC, exploiting consumers
-high prices, lower CS, restricted output, choice lower as resources are not following consumer demand
possibly decrease in quality

Question 12

monopoly efficiencies
productive efficiency

Answer 12

NOT productively efficient as they are intentiently foregoing EoS by not producing by not producing at minimum of AC curve
reason why increase in price
Lack of pressure from competition

Question 13

monopoly efficiencies
x- efficiency

Answer 13

NOT x-efficient as producing above AC curve, possibly due to complacency
difficult to reduce x - inefficiency

Question 14

monopoly efficiency
dynamic efficiency

Answer 14

LR supernormal profit being made
re-investment

Question 15

DWL for monopolies

Answer 15

firms are profit maximisers and have a higher price and lower quantity
monopolies reduce the level of society surplus
consumers exploited massively through higher prices
argue that monopolies are a serious cause of market failure

Question 16

price discrimination

Answer 16

where a firm changes different prices to different consumers for an identical G/S with no differences in costs of production

Question 17

conditions necessary for price discrimination

Answer 17

-price making ability (monopoly power)
-information to separate the market, inelastic = high, elastic = low
-prevent re sale ( market seepage)

Question 18

1st degree price discrimination

Answer 18

when consumers are charged the exact price theyre are willing to pay completely eroding CS, into monopoly profit

Question 19

2nd degree price discrimination

Answer 19

excess capacity pricing
when a firm with a fixed capacity (airline/ train seats, hotel, cinema etc.), makes no sense to keep any capacity idle to pay fixed costs so they lower prices last minute to fill capacity and contribute to fixed costs

Question 20

3rd degree price discrimination

Answer 20

when a firm is able to segment the market into different price elasticities of demand
one group with inelatsic demand and other group with elastic demand, firms recognise it by age, income etc.
e.g. rail company - inelastic (commuter) need to go to work, elastic - travellers

MC is constant as cost to fill one extra seat is same
profit maximise MC = MR

Question 21

cons of price discrimination

Answer 21

-allocative inefficiency (exploiting consumers)
-inequality
-anti-competative pricing (lower prices drives out competitors = lack of competition)

Question 22

pros of price discrimination

Answer 22

-dynamic efficiency
-economies of scale
-some consumers benefit
-cross subsidisation

Question 23

natural monopoly

Answer 23

water/ gas/ internet distributers
railway providers

Question 24

natural monopoly aspects

Answer 24

-huge fixed and start up costs
-enormous potential for EoS
-rational for a firm to supply the entire market, competition is not desirable
-competition would result in a wasteful duplication of resources and non exploitation of full EoS, allocative and productive inefficiency as first firm in market has the EoS and price advantage, so other firms will be forced out leaving behind infastructure which is wasteful

Question 25

MES for natural monopoly

Answer 25

potential for EoS is huge, high TC, so to minimise AC, quantity must be very high LRAC is downward sloping for a hge quantity range so MES occurs at a very high output

Question 26

regulators role in natural monopolies

Answer 26

high prices, low quantities, regulators wont like this as consumers wont be able to afford water, transport etc. cannit run a the social optimum as AR < AC leading to subnormal profit - leave market subsidy per unit given by regulator covers loss, allows firm to make normal profit, little incentive for private natural monopoly

Question 27

cons of monopoly

Answer 27

-allocative inefficiency -productive inefficiency -x - inefficiency -inequality in necessity markets (regressive)

Question 28

pros of monopolys

Answer 28

-dynamically efficient -greater EoS - MCm lower than MCc due to greater EoS, therefore a profit maximising monopolist charges a lower price then a allocative efficient competitive firm -a regulated natural monopoly gives socially desirable outcomes oppose to NM with competition -cross subsidisation

Question 29

evaluation points for monopolies

Answer 29

-dynamic efficiency (will it occur and what will be done with it, saved, debt, pay stakeholders etc.) -EoS or DoS -objective, assume monopoly is profit max -regulation (reduces inefficiencies) -price discrimination can exaggerate cons -competition -natural monopoly -type of G/S

Question 30

monopolistic competition aspects

Answer 30

-many buyers and sellers -slightly differentiated goods -firms are price makers, only slightly as there are good subs so cant massively increase price -price elastic demand -low barriers to entry / exit -good information -non-price competition(as they cant raise price for full exploitation) -assume firms are profit maximisers

Question 31

monopolistic competition example markets

Answer 31

clothing markets, taxis, resturants etc.

Question 32

LR monopolistic competition

Answer 32

in the long run, firms enter the market(low BtoE) by supernormal profits as they enter demand for individual market shifts left as consumers are shared, keeps shifting left until AR = AC, normal profit is made

Question 33

LR monopolistic competition conclusions

Answer 33

allocative efficiency not achieved in LR means consumers exploited, prices > costs etc. -productively inefficient as costs arent minimised -no LR supernormal profits so not dynamically efficient

Question 34

LR monopolistic competition conclusions counter arguements

Answer 34

-AE - price making ability is lower so exploitation is minimised perfect competition has homogenous goods, no choice, consumers willing to pay more for more choice -PE - good substitutes so firms can afford to forego EoS, in PC EoS is small, PE not achieved due to differentiation -DE could occur as SR supernormal profit could be used or re-invested normal profit to keep up with competition despite it being small