Micro 5.6

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When does a pure monopoly exist?
When there is a single supplier of a good or service, which therefore has 100% market share.
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What is monopoly power?
The power of a firm in a market to act as a price maker.
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What is a price maker?
A firm with the power to set the market ruling price.
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What are the barriers to entry like in industries dominated by monopoly power?
High.
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How can firms with monopoly power boost supernormal profits?
They can restrict their output in order to raise price.
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Why are firms able to maintain supernormal profits?
Because it is unlikely that new firms can easily enter the market to compete for these profits.
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Where does the monopolist maximise profits?
At the level of output at which MC = MR.
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What are barriers to entry?
Features of a market that makes it difficult or impossible for new firms to enter the market.
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What are 5 examples of barriers to entry?
Natural, economies of scale, legal, product differentiation, sunk costs.
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What can natural barriers to entry include?
Naturally occurring climatic, geographical or geological factors that make the product difficult to replicate elsewhere.
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When do economies of scale occur?
When a firm’s average costs of production fall as output increases.
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How do economies of scale affect large firms?
They can set their prices below those of any potential new entrant firms to the market, and still make a supernormal profit.
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What can large firms do in terms of prices with economies of scale?
They will be able to negotiate a cheaper price per unit in terms of bulk-buying discounts, which acts as a deterrent for new firms to enter the market.
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What do legal barriers to entry include?
Patents, copyrights and trademarks.
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What do legal barriers to entry give?
The right to have a monopoly over a new product, process or other intellectual property either forever or over a given time, which legally cannot be copied.
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What is product differentiation?
Using advertising or product design to make a product seem different from those of competitors.
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What are sunk costs?
Costs that cannot easily be recovered if a firm is unsuccessful in a market and has to exit.
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What is an example of sunk costs?
Spending on specialist market research or specialist equipment that could not easily be sold to another firm.
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How do sunk costs act as a barrier to entry?
The threat of losing money stops new entrants.
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What may be considered concentrated markets?
Monopolies and oligopolies.
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What is the degree of concentration?
The total market share held by the largest firms in a market.
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What are 2 advantages of a monopoly?
Economies of scale and innovation.
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What are 4 examples of economies of scale?
Financial, technical, marketing, managerial.
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What is innovation?
New products and production processes that are developed into marketable goods or services.
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How do supernormal profits lead to innovation and higher quality?
There is more funding available to invest in research and development.
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What are 3 disadvantages of a monopoly?
Productive inefficiency, allocative inefficiency, X-inefficiency.
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When does productive inefficiency occur?
When firms produce at minimum average total cost, i.e. when minimum inputs are used to produced maximum outputs.
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Why do monopolies not have to be competitive to survive?
Because they do not face the threat of firms taking their market share, and there is little incentive (other than generating profits for shareholders) to cut costs to a minimum.
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When does allocative inefficiency occur?
When firms produce products that consumers value most highly, in the right quantities.
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Why do monopolies not have to produce the best goods and services?
There are few, if any, competitors.
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What does the lack of competition mean for consumers?
They may have little choice but to buy whatever is produced.
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What is X-inefficiency?
The lack of willingness of firms with monopoly power to control their costs of production.
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What does X-ineffiency mean for firms with monopoly power?
They operate with higher costs than necessary.
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What is a natural monopoly?
Where it is uneconomic for more than one firm to supply a market because a firm enjoys continuous economies of scale.
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Why is it productively efficient for one firm to supply the market with a natural monopoly?
As several individual firms could never achieve the low costs of the single firms.
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What do firms experience in natural monopolies?
Continuous economies of scale.
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What do continuous economies of scale within firms imply?
If the market were broken into more than one firm, average costs would be higher than for a single firm, meaning that prices might have to be higher.
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What is a natural monopoly an argument in favour of?
Concentrated markets.
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Other cards in this set

Card 2

Front

What is monopoly power?

Back

The power of a firm in a market to act as a price maker.

Card 3

Front

What is a price maker?

Back

Preview of the front of card 3

Card 4

Front

What are the barriers to entry like in industries dominated by monopoly power?

Back

Preview of the front of card 4

Card 5

Front

How can firms with monopoly power boost supernormal profits?

Back

Preview of the front of card 5
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