Chapter 14 - Monopoly

Question 1

What is monopoly?

Answer 1

a firm that is the only producer of a good or service with no close substitutes.

Question 2

When is a firm a perfect monopoly?

Answer 2

if it controls the entire market.

Question 3

When does a firm have monopoly power?

Answer 3

if it can manipulate the price

Question 4

Why do monopolies exist?

Answer 4

because of barriers to entry that prevent other firms from entering the market:

1. scarce resources
2. economies of scale
3. governmental intervention
4. aggressive business tactics

Question 5

What does scarce resources mean?

Answer 5

not possible to enter the market because there is scarcity resources or input of the production process

Question 6

Economies of scale

Answer 6

high fixed costs are better to produce at larger scale to take advantage of economies of scale
- new firms are prevented to enter the market because of this

• natural monopoly

Question 7

What is a natural monopoly?

Answer 7

refers to a market where a single firm can produce the entire market quantity demanded at a lower cost than multiple firms.

eg. electricity, drinking water, natural gas

Question 8

What is government intervention?

Answer 8

monopoly created or sustained by governments where they would not otherwise exist

• to protect consumers
• for state-owned firms
• to protect intellectual property rights

Question 9

Aggressive business tactics

Answer 9

incumbent firm prevent new entries

• acquiring competitors
• predatory pricing = temporarily slashing prices until rival local stores are forced out of business
• threatening them

Question 10

Monopolists and the Demand Curve

Answer 10

face downward-sloping market

- a monopolist can charge any price, but the price affects the quantity demanded

Question 11

Monopoly Revenue

Answer 11

when a monopolist produces more of a good, the market price is driven down
- in a competitive market, a firm can sell as much as it wants without changing the market price

1. Quantity effect: TR increases
2. Price effect: TR decreases

Question 12

Profit-maximizing quantity of output for a monopoly

Answer 12

found where Marginal Revenue = Marginal Cost

Question 13

How do you calculate profit?

Answer 13

Profit = (P-ATC) x Q

• when price is greater than ATC, profits will be positive even in the long run

Question 14

The welfare costs of monopoly

Answer 14

a monopoly’s ability to keep quantities low and prices high hurts society in general and consumers in particular

• welfare costs associated with monopolies is a positive statement (fact)
• many voters and policy-makers make normative statements concerning monopolies (how should be)

Question 15

Public policy responses: Antitrust Laws

Answer 15

Competition Act =

1. to promote the efficiency and adaptability of the Canadian economy
2. to expand opportunities for Canadian participation in world markets
3. To ensure that small and medium-sized enterprises have an equitable opportunity to participate
4. to provide consumers with competitive prices and product choices

Question 16

Public policy responses: Public ownership

Answer 16

• natural monopolies occur when one firm can achieve lower costs of production than multiple firms
• a public policy response to natural monopolies is to allow the government to run them

Pros = set prices lower and provide broader services

Cons = political pressure, loss of profit incentive

Question 17

Public policy responses: Regulation

Answer 17

• takes the form of price controls

firms have an incentive to avoid releasing information about their true production costs

Question 18

Public policy responses: Vertical Splits

Answer 18

introduce competition into parts of the monopoly
- split original firm into companies that operate at different points in the production process

(horizontal split = monopolist is separated into several firms that compete with each other)

Question 19

Public policy responses: no response

Answer 19

might be preferable if regulation is difficult and or ineffective to establish and manage
- common when government interventions are subject to corruption or political mishandling

Question 20

What is price discrimination?

Answer 20

the practice of charging customers different prices for the same good (to increase monopoly profits)