Chapter 14 - Monopolies

• What is the definition of a monopoly?

  A market with only one firm operating
• What is a characteristic of a monopoly?

  Firms are price makers with downward sloping demand
• What is dynamic efficiency?

  Efficiency considering innovation and technical progress
• What is X-inefficiency?

  Not operating at minimum cost due to slack
• What is a natural monopoly?

  A monopoly with substantial economies of scale
• What is the relevance of MC=MR in a monopoly?

  Profit maximizing quantity of output for a firm
• What does P=MC signify in economic terms?

  Allocative efficiency for society's best output
• What does the lowest point of the AC curve indicate?

  Productive efficiency and best resource use
• What are barriers to entry in a monopoly market?

  High startup costs and legal restrictions
• Why can't monopolies charge any price they want?

  They must consider consumer demand on the curve
• What is the outcome of monopolies in terms of profits?

  Monopolies make supernormal profits in SR and LR
• How does a monopolist determine equilibrium price and output?

  By producing where MR=MC for profit maximization
• What is price discrimination in monopoly power?

  Charging different prices to different consumers
• What are the advantages of a monopoly?

  Can achieve economies of scale and efficiency
• What are the disadvantages of a monopoly?

  Can exploit consumers with higher prices
• What is the role of the Competition Commission?

  Regulates firms with 25% or more market share
• What is price discrimination in a monopoly?

  Charging different prices for identical goods
• What is the significance of economies of scale in natural monopolies?

  One firm can supply the market more efficiently
• How does price discrimination affect consumer surplus?

  It reduces consumer surplus and increases producer surplus
• What is a necessary condition for price discrimination?

  Firms must have market power
• Why must firms know consumers' willingness to pay?

  To determine maximum price to charge each consumer
• What happens if consumers can easily re-sell products?

  It undermines the firm's price discrimination strategy
• How does a natural monopoly achieve allocative and productive efficiency?

  If regulated properly by the government
• How do different elasticities of demand relate to price discrimination?

  Different consumer groups have varying price sensitivities
• What is the impact of competition on natural monopolies?

  Can lead to wasteful duplication of resources
• What can be done to control a monopoly?

  Nationalization and price controls by regulators
• What is the main objective of first-degree price discrimination?

  To capture all consumer surplus as profit
• What is the purpose of introducing competition into a monopoly industry?

  To separate infrastructure from final consumer services
• How does the government regulate monopolies?

  By overseeing pricing and market practices
• What is the significance of the minimum efficient scale in a natural monopoly?

  It allows one firm to dominate the market
• How does second-degree price discrimination work?

  Different prices for different quantities purchased
• How does a monopoly affect consumer surplus?

  It reduces consumer surplus due to higher prices
• What is the relationship between allocative efficiency and monopolies?

  Monopolies are not allocatively efficient
• What does productive efficiency mean in the context of monopolies?

  Occurs when MC=AC at minimum cost
• What is X-efficiency in monopolies?

  Occurs when firms lack incentive to control costs
• Why might a monopolist operate above its average cost?

  Due to complacency from lack of competition
• How does third-degree price discrimination function?

  Prices vary based on consumer group elasticities
• What is the impact of a monopoly on innovation?

  Can stifle innovation due to lack of competition
• What happens to consumer surplus under normal pricing?

  All consumers pay the same lower price
• How does a monopoly affect market entry for new firms?

  Creates high barriers to entry for competitors