ECONOMICS YR 2 > MONOPOLIES > Flashcards

MONOPOLIES Flashcards

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1
Q
A
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2
Q

WHAT IS A PURE MONOPOLY?

A

WHEN THERE IS ONLY 1 FIRM IN THE MARKET. A FIRM WOULD HAVE A MARKET SHARE OF 100%

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3
Q

WHAT IS WORKING MONOPOLY (CMA DEFINITION)?

A

WHEN A FIRM HAS A DOMINANT MARKET POSITION. A FIRM WOULD HAVE A MARKET SHARE OF 25% OR MOREE

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4
Q

WHAT R ASSUMPTIONS OF A PURE MONOPOLY?

A
  1. ONLY 1 FIRM IN THE MARKET
  2. BARRIERS TO ENTRY PREVENT NEW FIRMS FROM ENTERING THE MARKET (E.G LARGE EoS, PATENTS, MARKET BARRIERS, REGULATIONS ETC)
  3. THE MONOPOLIST IS A SR PROFIT MAXIMISER
  4. A MONOPOLY FIRM IS ITSELF THE MARKET, THEREFORE AS THE MARKET FACES A DOWNWARD SLOPING DEMAND CURVE, SO TOO MUST THE MONOPOLIST
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5
Q

WHAT IS ASSUMED ABOUT MONOPOLISTS IN THE SR?

A

IN THE SR, IT IS ADDIMED THAT A MONOPOLIST IS A SR PROFIT MAXIMISER MEANING IT WILL PROCUCE WHEN MC=MR

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6
Q

WHAT PRODUCTIVE EFFICIENCY?

A

EXISTS WHEN PRODUCTION IS ACHIEVED AT MIN COST I.E AT THE MIN EFFICIENCY SCALE.

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7
Q

WHAT IS THE MIN EFFICIENT SCALE?

A

THE MIN POINT ON THE AC CURVE.

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8
Q

WHAT IS ALLOCATIVE EFFICIENCY?

A

OCCURS WHEN SCARCE RESOURCES R ASSIGNED EFFECTIVELY - IN A MARKET THIS IS SHOWN WHERE DEMAND=SUPPLY

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9
Q

WHAT IS DYNAMIC EFFICIENCY?

A

REFERS TO IMPROVING EFFICIENCY OVER A PERIOD OF TIME.

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10
Q

WHAT DOES DYNAMIC EFFIENCY REQUIRE?

A

RETAINED SUPERNORMAL PROFITS SO FIRMS CAN REINVEST PROFITS INTO R&D AND INTELLECTUAL PROPERTY LAW SUCH AS PATENTS.

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11
Q

WHAT IS X-INEFFIENCY?

A

DESCRIBES BUREAUCRACY AND COMPLACENCY (ORGANISATIONAL SLACK)

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12
Q

WHEN R RESOURCES ALLOCATED EFFICIENTLY ON A DIAGRAM?

A

WHERE PRICE = MC AND AR=MC

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13
Q

HOW IS DYNAMIC EFFICIENCY SHOWN ON A DIAGRAM?

A

SHFTING THE ENTIRE AC CURVE DOWNWARDS.

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14
Q

WHAT FORMS COULD DYANMIC EFFIENCY COME IN?

A
  1. CREATING NEW GOODS AND SERVICES THAT SOCIETY NEEDS E.G A CURE FOR CANCER
  2. CREATING PROCESSES THAT WILL IMPROVE EFFICIENCY IN THE FUTURE E.G NANOTECHNOLOGY
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15
Q

WHY DOES X-INEFFIENCY OCCUR?

A

LARGE ORGANISARTIONS DON’T FACE MUCH COMPETITION FACE LESS PRESSURE TO BE EFFICIENT AND PUBLIC SECTOR ORGANISATIONS DON’T HAVE A PROFIT MOTIVE TO ENCOURAGE COST CUTTING.

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16
Q

HOW CAN X-INEFFICIENCY BE SHOWN ON A DIAGRAM?

A

THE ENTIRE AC CURVE SHIFTING UPWARDS.

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17
Q

HOW IS SOCIAL EFFICIENCY SHOW ON A DIAGRAM?

A

MSB=MSC

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18
Q

WHEN CAN FIRMS STAY IN BUSINESS IN THE SR?

A

WHEN PRICE IS GREATER THAN AVC CURVE.

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19
Q

WHEN DO FIRMS LEAVE THE MARKET IN THE LR?

A

WHEN MAKING A LOSS

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20
Q

ARE MONOPOLIES PRODUCTIVELY EFFICIENT?

A

NO - IF THEY PRODUCE AT PROFIT MAXIMISING, ALLOCATIVE EFFICIENCY OR NORMAL PROFIT THEY WON’T BE AT THE BOTTOM OF AC.

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21
Q

ARE MONOPOLIES ALLOCATIVELY EFFICIENT?

A

NO - IF THEY PRODUCE AT PROFIT MAXIMISING AND NOT WHERE MC(S) = AR(D)
MORE - IF IT’S A CONTESTABLE MARKET
YES - IF THEY R PUBLIC SECTOR

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22
Q

ARE MONOPOLIES DYNAMICALLY EFFICIENT?

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A

THEY DON’T MAKE SUPERNORMAL PROFIT ( IN PRIVATE SECTOR) AND HAVE PATENTS BUT WHETHER THEY INVEST IN IT DEPENDS ON CONTESTABILITY

IN PUBLIC SECTOR, THEY WON’T HAVE SUPERNORMAL PROFITS TO REINVEST.

23
Q

ARE MONOPOLIES X-EFFICIENT?

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A

YES - IF PUBLIC SECTOR AS THERE IS NO PROFIT MOTIVE
NO - IF MARKKET IS CONTESTABLE AND THEY’RE SEEKING TO MAKE PROFITS.

24
Q

ARE MONOPOLIES SOCIALLY EFFICIENT?

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A

YES - PUBLIC SECTOR CARE ABOUT EXTERNALITIES
NO - PRIVATE SECTOR DON’T CARE ABOUT EXTERNALITIES

25
AT WHAT POINTS DOES A FIRM PROFIT MAXIMISE?
WHEN MC = MR
26
AT WHAT POINT DOES A FIRM REVENUE MAXIMISE?
MR=0
27
AT WHAT POINT DOES A FIRM SALES MAXIMISE?
AR=AC
28
WHY MAY LOSS-MAKING FIRMS CONTINUE TO OPERATE IN THE SR?
1. HAVE SIGNIFICANT RESERVES FROM PREVIOUS YRS 2. IF EACH ADDITIONAL UNIT SOLD CONTRIBUTES TO REDUCING THE SIZE OF LOSSES
29
WHERE MAY A NATIONALISED INDUSTRY PRODUCE AND WHY?
AT THE ALLOCATIVELY EFFICIENT POINT (MC=AR)
30
WHAT IS PRICE DISCRIMINATION?
THE PRACTICE OF CHARGING SOME CUSTOMERS A HIGHER PRICE THAN OTHERS FOR AN IDENTICAL GOOD OR SERVICE
31
WHAT IS 3RD DEGREE PRICE DISCRIMINATION?
FIRM SPLITS THE MARKET INTO DIFFERENT GROUPS BASED ON ELASTICITY OF DEMAND AND CHARGES DIFFERENT PRICES TO DIFFERENT GROUPS.
32
HOW CAN A MONOPOLIST CHOOSE TO DISCRIMINATE?
1. TIME E. G PEAK/OFF-PEAK TRAIN 2. PLACE E. G A BOTTLE OFWATER COSTS MORE IN AN AIRPORT THAN IN A HIGH STREET 3. INCOME E.G DISCOUNTS FOR THOSE ON BENEFITS 4. AGE/ SEX OF CONSUMER . E. G STUDENT DISCOUNT
33
WHAT CONDITIONS ARE NEEDED FOR PRICE DISCRIMINATION?
1. MONOPOLY POWER (PRICE SETTERS) 2. DIFFERENT DEMAND CURVES MUST EXIST (ELASTICITY MUST VARY) 3. BUYERS MUST BE SPLIT INTO DISTINCT GROUPS 4. MONOPOLIST MUST BE ABLE TO KEEP THE MARKETS SEPARATE AT A RELATIVELY LOW COST ( NO ARBITRAGE)
34
WHAT ARE THE ADVANTAGES OF PRICE DISCRIMINATION FOR FIRMS?
1. HIGHER PROFITS AND INCREASED PRODUCER SURPLUS 2. ENSURES SPARE CAPACITY IS USED UP 3. IMPROVED CASH FLOW
35
WHAT ARE THE DISADVANTAGES OF PRICE DISCRIMINATION FOR FIRMS?
1. COSTS OF IMPLEMENTATION 2. COULD ATTRACT BAD PUBLICITY/CMA ATTENTION 3. DOESN'T WORK UNLESS ALL CONDTITIONS ARE MET
36
WHAT ARE THE ADVANTAGES OF PRICE DISCRIMINATION FOR CONSUMERS?
1. PRODUCTS CAN BE MADE AFFORDABLE TO THOSE WHO OTHERWISE WOULDN'T BE ABLE TO PAY E.G DISCOUNTS FOR THOSE ON LOW INCOMES. 2. LOSS-MAKING PRODUCTS CAN BE CROSS-SUBSIDISED E.G THE PROFITS FROM CITY CENTRE BUSES COULD BE USED TO FUND OTHERWISE LOSS MAKING RURAL BUS SERVICES.
37
WHAT ARE THE DISADVANTAGES OF PRICE DISCRIMINATION FOR CONSUMERS?
1. HIGHER PRICES AND LOWER CONSUMER SURPLUS FOR CUSTOMERS WITH INELASTIC DEMAND.
38
WHAT ARE NATURAL MONOPOLIES?
EXIST WHEN NOTEVEN 1 PRODUCER CAN EXPLOIT Eo S AVAILABLE i.e THE EOS ARE INFINITE. MEANS IT IS MOST ECONOMICALLY EFFICIENT TO HAVE JUST 1 PRODUCER.
39
IN WHAT INDUSTRIES DO NATURAL MONOPOLIES EXIST?
RAILWAYS GAS ELECTRICITY WATER TELEPHONES
40
WHAT ARE THE CHARACTERISTICS OF A NATURAL MONOPOLY?
VERY LARGE FIXED COSTS VERY SMALL MARGINAL COSTS
41
WHAT WOULD HAPPEN IF A NATURAL MONOPOLIST WAS IN THE PUBLIC SECTOR?
GOVT WOWD PRODUCE AT THE ALLOCATIVELY EFFICIENT POINT (P/AR=MC) LEADING TO A LOSS MEANING THE FIRM NEEDS SUBSIDIES TO SURVIVE OR MAY NEED TO LOWER QUALITY.
42
WHAT WOULD HAPPEN IF A PRIVATE MONOPOLIST WAS PRIVATISED?
WOULD MAKE SNP WOULD BE LESS PRODUCTIVELY AND ALLOCATIVELY EFFICIENCY NEED FOR GOVT REGULATION
43
AT WHAT POINT DOES A NATURAL MONOPOLY PRODUCE AT MINIMUM EFFICIENT SCALE?
IT CAN'T - MC AND AC NEVER MEET
44
SHOULD THE GOVT TRY TO REDUCE BARRIERS TO ENTRY FOR NATURAL MARKETS TO ENCOURAGE MORE COMPETITION?
NO- FIRMS WOULDN'T BE ABLE TO EXPLOIT Eos
45
What are the benefits of monopolies for firms?
1. Potential for EoS 2. Higher prices 3. Price discrimination raises revenue 4. SNP = funds for R&D
46
What are the disadvantages of monopolies for firms?
X-inefifciency through lack of competition
47
What are the advantages of monopolies for consumers?
1. Lower inequality (cheaper prices for poor from price discrimination) 2. Creation of new products from dynamic efficiency 3. EoS can lead to lower prices if market is contestable
48
What are the disadvantages of monopolies for consumers?
1. Barriers to entry = reduced choice and competition 2. Lower quality as no incentive to improve 3. Higher prices = reduced consumer surplus particularly if price discrimination is used
49
What are the advantages of monopolies for employees?
Higher profits could lead to bonuses for managers
50
What are the disadvantages of monopolies for employees?
1. Lower employment as lower output 2. Lower wages as a lack of choice where to work
51
What are the disadvantages of monopolies for suppliers?
Monopsony power = lower prices for suppliers
52
What are the advantages of monopolies for the govt?
1. Dynamic efficiency from SNP 2. National champion improving a country's exports 3. Avoids undesirable duplication of resources e.g 3 underground railways
53
What are the disadvantages of monopolies for the govt?
1. Allocatively inefficient 2. Too big to fail - bankruptcy could affect macroeconomy 3. Productively inefficient if not profit maximising 4. Political power = regulatory capture
ECONOMICS YR 2
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