Monopolies

• What is a key characteristic of monopolies?

  Profit maximisation
• How do monopolists earn profits?

  They earn supernormal profits in both short and long run
• What defines a pure monopoly?

  Sole seller in a market
• What are high barriers to entry?

  Obstacles that prevent new firms from entering
• What is a price maker?

  A firm that sets its own prices
• What is price discrimination?

  Charging different prices to different consumers
• What market share indicates monopoly power in the UK?

  More than 25% market share
• How does Google exemplify monopoly power?

  It has a 90% share in search engines
• What happens when two firms in an oligopoly have over 25% market share?

  They are said to have monopoly power
• What is the difference between pure monopolies and firms with monopoly power?

  Pure monopolies have no competition, others may
• How do barriers to entry affect monopoly power?

  Higher barriers make it easier to maintain power
• What is economies of scale?

  Cost advantage as firms grow larger
• How does limit pricing maintain monopoly power?

  By setting prices below new entrants' costs
• What are sunk costs?

  Unrecoverable costs that deter new firms
• How does brand loyalty affect market entry?

  It makes it difficult for new firms to compete
• What are set-up costs?

  Costs to establish a new firm
• How does the number of competitors affect monopoly power?

  Fewer competitors lead to higher monopoly power
• How does advertising create barriers to entry?

  It increases consumer loyalty and demand inelasticity
• How does product differentiation affect market share?

  More differentiation makes gaining market share easier
• What is the equilibrium condition for profit maximisation in a monopoly?

  MC = MR
• What output does a monopolist produce at profit maximisation?

  Output of Q1 at price P1
• What does the shaded rectangle represent in monopoly diagrams?

  Area of supernormal profits
• Why is there allocative inefficiency in a monopoly?

  Because P > MC due to profit maximisation
• What does AR > AC indicate in a monopoly?

  There are supernormal profits
• What are the advantages and disadvantages of monopolies?

  Advantages:

  • Significant supernormal profits for R&D
  • Potential for positive externalities
  • More innovation due to protection of ideas
  • Possible efficiency in natural monopolies

  
  

  Disadvantages:

  • Higher prices and inefficiency
  • Misallocation of resources
  • Exploitation of consumers
  • Loss of consumer surplus
• How can monopolies generate export revenue?

  By selling products internationally
• What happens to consumer surplus when a monopolist raises prices?

  There is a loss of consumer surplus
• What is the effect of monopolies on consumer choice?

  Consumers have less choice than in competition
• How can high profits from monopolies affect government revenue?

  They can increase government tax revenue
• What is the relationship between monopoly power and barriers to entry?

  Higher barriers lead to greater monopoly power
• How does a natural monopoly operate efficiently?

  By having only one firm provide a service
• What is the impact of monopolies on production costs?

  Monopolies may have higher production costs
• What is the long-run average cost curve in monopolies?

  It shows lower average costs due to economies of scale
• How do monopolies affect innovation?

  They may innovate more due to supernormal profits
• What is the relationship between monopoly power and consumer needs?

  Monopolies may not fully meet consumer needs
• What is the effect of monopolies on market efficiency?

  Monopolies can lead to market inefficiency
• How do monopolies impact resource allocation?

  They may misallocate resources compared to competition