Monopoly Flashcards
(34 cards)
What is a pure monopoly?
One firm with 100% market share
This is a theoretical extreme of monopoly.
What defines monopoly power legally?
A firm has more than 25% control of the market
This is also known as a legal monopoly.
What type of products do monopolies typically offer?
Unique products
These products are differentiated from those of competitors.
What role do monopolies play in pricing?
Price makers
Monopolies set prices rather than taking them from the market.
What is fundamental for monopolies to maintain supernormal profits?
High barriers to entry and exit
These barriers prevent new competitors from entering the market.
What does imperfect information in a monopoly context imply?
Keeps firms out of the market
Consumers and potential entrants may lack necessary information to compete.
Where does a profit-maximizing firm produce?
Where marginal revenue (MR) equals marginal cost (MC)
This is the optimal output level for maximizing profit.
What is the shape of the average cost (AC) curve in a monopoly?
A ‘smiley face’ shape
This indicates the relationship between output and average costs.
How does marginal revenue (MR) relate to average revenue (AR) in a monopoly?
MR is twice as steep as AR
This reflects the price-making ability of monopolies.
What occurs at quantity q1 in a monopoly?
Average revenue is compared to average cost
This comparison determines the level of supernormal profit.
How is total profit calculated in a monopoly?
Multiply the supernormal profit per unit by q1
This gives the overall profit earned at output level q1.
What is allocative efficiency in the context of monopolies?
Occurs where price (P) equals marginal cost (MC)
Monopolies are not allocatively efficient as they charge higher prices.
Why are monopolies considered not productively efficient?
They do not produce at the minimum point on their average cost curve
This leads to higher average costs than necessary.
What is X-inefficiency?
Occurs when monopolies produce beyond their average cost curve
This can lead to waste and excess costs.
What might happen if a monopolist gets too large?
They may experience diseconomies of scale
This reduces efficiency and increases costs.
What is the difference between static and dynamic efficiency in monopolies?
Monopolies are statically inefficient but have potential for dynamic efficiency
Dynamic efficiency can lead to innovation and improvement over time.
What can long-run supernormal profits be reinvested into?
- New technology
- Innovative new products
- Research and development
- Capital investment
*Cross Subsidising goods
These investments can benefit consumers and the business in the long run.
What is allocative inefficiency in the context of monopolies?
Price is greater than marginal cost, leading to reduced consumer surplus and restricted output and choice.
Allocative inefficiency occurs when resources are not allocated to their best use, resulting in a misallocation of resources from the perspective of society.
What is productive inefficiency?
Monopolies do not minimize costs and may either operate to the left or right of the minimum point on the average cost curve.
Productive inefficiency occurs when a firm is not producing at its lowest possible average cost.
Define X-inefficiency.
Waste in production due to lack of competitive drive, leading to excess costs and higher prices.
X-inefficiency is the difference between efficient behavior assumed by economic theory and actual behavior of firms.
How do monopolies affect income inequality?
Higher prices in necessity markets disproportionately affect the poor, potentially widening income inequalities.
What is dynamic efficiency in monopolies?
Reinvestment of supernormal profits into the business, leading to innovation, new products, and better technologies.
Dynamic efficiency refers to improvements in the productive efficiency of firms over time.
What are economies of scale?
Cost advantages obtained due to the scale of operation, with cost per unit decreasing as output increases.
Relevant in industries like high manufacturing and supermarkets.
What is a natural monopoly?
A monopoly that arises when average costs of production decline relative to the size of the market.
Regulated natural monopolies can provide desirable outcomes for society.
