Monopoly

Question 1

Definition of monopoly

Answer 1

a form of market structure in which there is only one seller of a good or service

Question 2

What assumptions are made about monopolies

Answer 2

• The firm aims to profit maximise
• there is a single seller of a good or service
• there are no substitutes for the product ie heterogenous
• The market has VERY HIGH barriers to entry
• There is imperfect knowledge (patents/advanced production techniques)

Question 3

What does a monopoly P/R/C diagram look like

Answer 3

• AR and MR sloping downwards (MR= half AR)
• profit maximising level of production (MR=MC)
• AC lower than Price leading to long run SNP

Question 4

What are the advantages and disadvantages of monopolies?

Answer 4

adv- likely to be dynamically efficient due to the SNP being reinvested into R+D
-Benefits from economies of scale due to only one firm exploiting leads to lower AC

DIS ADV- not allocatively efficient because price doesn’t equal MC, nor is it productively efficient because they’re not at the bottom of the AC

• Little incentive to increase efficiency due to no competition, leads to higher costs and prices (x inefficiency)
• may not be dynamically efficient due to lack of competition so no incentive to reinvest SNP into R + D and improving quality of product

Question 5

Why could a monopoly be better or worse than a more competitive market ie monopolistic competition

Answer 5

Better- depends on objectives- a state owned monopoly may seek better productive efficiency and consider social costs and benefits
-a monopoly that gets threatened by competition can be forced to improve dynamic efficiency whilst still benefitting from economies of scale

Worse- complacent monopolies that don’t respond to threats of competition will continue to be x inefficient and change higher prices which is bad for consumers (also less consumer choice)