MONOPOLY

Question 1

What is a monopoly

Answer 1

A monopoly is where there is only one firm in the market.

Question 2

What is a legal monopoly?

Answer 2

A firm is legally considered a monopoly when its market share is over 25%

Question 3

What is a pure monopoly?

Answer 3

A pure monopoly is just one firm that controls the entire market. They have 100% market share

Question 4

What is market share?

Answer 4

How much of the market the firms own.

Question 5

What are the 3 assumptions that economists make when modelling a monopoly?

Answer 5

1)assume only one firm in the market
2)assume they are profit maximisers
3)assume theres high barriers to entry

Question 6

What are the four types of barriers to entry?

Answer 6

1)legal barriers
2)Sunk costs
3)Economies of Scale
4) Brand loyalty

Question 7

What are legal barriers?

Answer 7

Legal barriers include any patents, copyrights or trademarks that stop new firms from using the ideas from an incumbent firm.

Question 8

What is an incumbent firm?

Answer 8

A firm already in the market

Question 9

What are sunk costs?

Answer 9

Sunk costs is a barrier to entry as it deters new firms from entering the market as they know there are high costs of failure. The money cant be recovered if a firm leaves the market.

Question 10

Example of a sunk cost

Answer 10

Advertising as you cannot recover the money spent on advertising.

Question 11

What happens when there are high sunk costs?

Answer 11

Increases the cost of failure

Question 12

Why would big firms use Internal economies of scale?

Answer 12

Big firms use internal economies of scale to reduce their long-run average costs.

Question 13

What are the 6 types of internal economies of scale?

Answer 13

1)risk-bearing
2)managerial
3)financial
4)purchasing
5)technical
6)marketing

Question 14

What is economies of scale

Answer 14

When an increase in output leads to a decrease in long run average cost

Question 15

In a monopoly, where do firms maximise profits?

Answer 15

Where MC=MR

Question 16

The monopoly diagram is the same as the…

Answer 16

Cost and revenue diagram

Question 17

What are the four measures of efficiency?

Answer 17

1)productive efficiency
2)allocative efficiency
3)x-inefficient
4dynamic efficiency

Question 18

What is productive efficiency?

Answer 18

When a good or service is produced at the lowest possible cost
When AC is at its lowest
And When MC=AC

Question 19

What is allocative efficiency?

Answer 19

Allocative efficiency is when welfare is maximised
Where MC=AR (price)

Question 20

What is x-inefficient

Answer 20

When a firm is producing above the AC curve for a given level of output

X-inefficiency happens when a lack of effective competition in an industry means that average costs are higher than they would be if the market was more contestable.

Question 21

What is dynamic efficiency?

Answer 21

It is when all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to a decrease in long run average costs.SNP must be made in the long run.

Question 22

the four measure of efficiency but in a monopoly.

Answer 22

1)Productively inefficient
2)Allocatively inefficient
3)Possibly dynamically inefficient(depending on how the CEO uses their supernormal profits)
4)x-inefficient

Question 23

What is a natural monopoly?

Answer 23

A natural monopoly is when it is naturally the most efficient if only one firm is in the market.

Question 24

Why may a monopoly be a natural monopoly, 2 reasons

Answer 24

If they have
1)high sunk costs
2)huge internal economies of scale

Question 25

What is price discrimination?

Answer 25

When a firm charges different groups of consumers different prices but for the same good.

Question 26

What are the 3 conditions that must be satisfied when price discriminating?

Answer 26

1) market power
2)information on consumer elasticities
3)limit reselling