Monopoly

Question 1

assumptions of monopoly

Answer 1

1. there is only one firm in the industry ie the firm is the industry, they are the price maker
2. firms aim to maximise profits
3. there are barriers to entry into the industry, therefore SNPs can be earned in SR and LR
4. the firm can control the quantity sold or price charged, but not both. the demand curve decides the latter
5. there is perfect knowledge of profit levels

Question 2

implications of the assumptions of monopoly

Answer 2

1. separate analysis of SR and LR are not required due to barriers of entry, short run profit maximisation can be maintained in LR
2. not faced with a horizontal D curve, instead a normal downward sloping D curve, ie if they want to sell more, lower the price
3. government monitoring is much more likely, to make sure theyre not abusing their power by charging absurdly high prices or engaging in practices against public interest

Question 3

how a monopoly arises

Answer 3

• through legislation - gov. grant sole rights to a product/service to 1 firm eg iaranroid eireann
• mergers/takeovers - (requires gov approval) existing firms in industry are taken over by 1 firm
• access to raw material - eg coal, gas
• cartels - firms agree to not compete in certain geographical areas
• product differentiation - firm creates brand loyalty so customers never leave eg coke
• copyrights/patents - inventors of a product can legally prevent anyone else from selling it eg dyson vacuum cleaners

Question 4

monopoly vs PC LR

Answer 4

• monopoly produce smaller quantity at higher cost
• PC makes NP, monopoly makes SNP
• PC is more efficient, produces at lowest AC

Question 5

monopoly vs IPC LR

Answer 5

• neither produces at lowest AC, both wasteful
• both face downward sloping D curve, both must lower price to drive up demand
• monopoly earns SNP in LR and SR, ICP earns SNP in SR only

Question 6

advantages of monopoly

Answer 6

1.benefit from economies of scale, may be able to therefore sell at lower price
2. avoid wasteful duplication of resources eg many bus companies lead to congestion
3. may be less vulnerable to changes in demand in the market as:
-earn SNP so can take lower price to keep sales, therefore able to keep stable employment
4. less advertising needed
5. provision of an essential good/service
which would not otherwise be provided by a PLC eg ESB

Question 7

disadvantages of monopoly

Answer 7

1. due to lack of competition, almost never produce at lowest AC therefore wasteful
2. SNP earned, consumers exploited, as they can higher prices, and customers have no choice but to purchase
3. consumers have no choice
4. no incentive for innovation as no comp.
5. may be able to practice price discrimination and further exploit the consumer

Question 8

deregulation

Answer 8

the removal of gov. controls from an industry or sector to allow for a free and efficient marketplace and could effect consumers, employees and companies
eg pubs

Question 9

benefits of competition

Answer 9

where there is a lack of comp. consumers face higher prices, less choice and lower quality

Question 10

how can state companies achieve greater productivity and efficiency

Answer 10

• deregulation
• appointing experienced entrepreneurs to state boards to bring a ‘value for money’ attitude to increase profits and reduce waste
• a profit motive and performance related remuneration
• allow companies to form strategic alliances eg Aer Lingus and Jet Blue
• discontinue unprofitable services
• privatisation

Question 11

benefits of privatisation

Answer 11

1. lowers prices
2. a better service
3. revenue from the sale of a state body benefits the gov.

Question 12

drawbacks of privatisation

Answer 12

• loss of unprofitable services
• loss of jobs - often large scale redundancies
• deterioration of standards
• overseas owners means control of the business leaves the state