Monopoly

Question 1

define monopoly market

Answer 1

a market where a single company or person is the sole supplier of a product or service as they provide the lowest unit cost/ LRAC than any other firm could
- means that consumers have no choice but to buy from that company

Question 2

characteristics of monopoly

Answer 2

• one seller dominates market= price maker
• high barriers to entry and exit
• differentiated goods
• imperfect info of market conditions
• firm is profit maximisers

Question 3

analysis of diagram

Answer 3

• allocative efficiency @ D=MC
  = charges price above MC
  = exploit consumers w high prices and Q is limited
  = decrease choice in market
• maximise profits by setting output where MR = MC
  = @ output Qm and Price Pm
  = monopolist increases price and reduces output
• dynamic efficiency as LR supernormal profits made= restricts competition entering market due to barriers

Question 4

adv monopoly

Answer 4

• monopolies usually large firms= exploit EoS
• dynamic efficiency= supernormal profits re-invested back into firm= more innovation to create new products for consumers= more choice
  = higher productivity leads to lower prices in LR
• exploit EoS due to large size= decrease price and increase quantity

Question 5

disadv monopoly

Answer 5

• x inefficient= increase waste in production process= less competition can be less productivity of workers etc= allow excess costs to creep in= lead to higher prices in LR
• lead to inequalities in necessity goods like food and water= high prices mean the poor suffer most= lead to income inequalities= lower SOL
• consumers exploited to high prices above MC

Question 6

evaluation

Answer 6

• may not always use extra profit into dynamic efficiency = cld give to shareholders, save, pay back debts etc
• depends on objective of firm= assume profit max but not always the case= cld be sales max etc
• depends on threat of potential competition
• depend on type of good or service= bad for necessity goods but not deep for electronics etc
• depends on current regulations
• depends on type of monopoly

Question 7

describe natural monopoly

Answer 7

where one large business can supply the entire market @ a lower LRAC contrasted with multiple providers
= because of the nature of costs in a natural monopoly are very high fixed costs and low marginal costs
= internal EoS available to the largest firms mean that there is a tendency for one business to dominate the market in the LR
- different shape of the LRAC curve is due to the nature of the industry and the barriers to entry that exist
- only room for one firm in industry to reach MES
- tend to be state owned and heavily regulated to ensure fair pricing
- LRAC continues to fall over a large range of output

Question 8

examples of natural monopolies

Answer 8

• water, gas and electricity distribution

Question 9

adv natural monopoly

Answer 9

• high fixed start up costs= railways expensive to build tracks, trains etc and water distribution pipe work= increase barriers to entry as only 1 can be most efficient
  = increase potential for Eos= spread high fixed costs across huge volume of output= huge quantity minimises AC (AC=TC/Q)
  = literally no risk for diseconomies of scale due to huge Q produced
• makes rational sense for only one firm to supply entire market
  = competition would result in wasteful duplication of resources
  = first firm that enters market gets EoS adv= if any other firm enters later, they won’t have same EoS adv= will eventually be priced out of market
  = as they leave the market, all of their infrastructure and resources will be wasted and left idle
  = x, allocative and productively inefficient
• competition would result in non exploitation of full EoS
  = won’t reach MES of EoS= firms won’t all be of greatest possible size

Question 10

EVAL of natural monopoly

Answer 10

• depends on regulations= if forced to produce @ allocative effeminacy due to high price and low quantity, firms will have higher LRAC than LRMC
  = create subnormal profit= loss per unit
• depends on subsidies given by regulator= loss may be covered by subsidies
  = subsidy would be equal to loss per unit

Question 11

examples of monopoly

Answer 11

• insulin has marginal cost of $3.36-$6 in 2018, market price of insulin in US is $340-$580
  = demand for insulin is price inelastic due to lack of substitutes doe diabetics
• the produce @ MC=MR (profit max)= large supernormal profits
• price is above MC of supply= allocatively inefficient= creates dwl

Question 12

causes of monopoly exploitive prices of insulin

Answer 12

• lack of regulations= market determines drugs prices, not gov
• complex supply chain to bringing insulin into market
  = involves multiple stakeholders like manufacturers, pharmacies, scientists etc who all add profit mark up to the price of insulin
• high fixed cost of research and development, clinical trials etc
  = all contribute to high AC= cause price to rise