monopoly

• monopolies are markets where one firm has a 25% or greater market share
• characteristics of a monopoly - unique products with no/few substitutes
• characteristics of a monopoly - high barriers to entry and exit
• characteristics of a monopoly - firms are price makers, yet are constrained by demand as a higher price means a lower quantity demanded
• characteristics of a monopoly - firms can set price or quantity, not both
• characteristics of a monopoly - supernormal profits can be made in the LR
• the firm is a profit maximiser, where MC=MR, then the firm will make supernormal profits in both the short and long run

  
• the diagram for SR and LR monopoly is the same, as the high barriers to entry means no new firms can enter the market
• a monopoly is not allocatively efficient as price is greater than MC

  
• a monopoly isn't productively efficient as it produces to the left on the AC curve

  
• a monopoly has the potential to be dynamically efficient as it can re-invest supernormal profits into the business in the LR
• if a monopoly doesn't innovate, it may lose its market dominance as barriers to entry may weaken
• to maximise profits and to compete with competitive businesses, monopolies will restrict output and raise prices - this creates a deadweight welfare loss, as the firm isn't allocatively efficient

  
• monopoly firms can have greater economies of scale and lower costs compare to firms in the market, as they are bigger and produce a greater output
• natural monopoly - a single firm that can efficiently serve an entire market due to significant economies of scale
• natural monopolies require regulation to prevent potential abuse of market power
• Disadvantages of Monopoly

  higher prices, loss of allocative efficiency, prices are more regressive on low income families, x-inefficiencies due to absence of market competition, lack of choice, monopsony power can put pressure on suppliers to reduce prices, supernormal profits may not be re-invested
• advantages of monopoly

  supernormal profits can be re-invested to create dynamic efficiency, can use economies of scale to have lower costs, increased international competitiveness, regulation to ensure consumers are not exploited and quality is maintained, enables positive price discrimination so those with low-income may be given services for free
• natural monopolies have high fixed costs, therefore if this was spread across multiple consumers, there would be higher costs per unit
• in a monopoly, due to the restricted supply, the goods will also be under-consumed and consumer demand will not be fulfilled
• in a monopoly there is no need to innovate or respond to changing consumer demand, meaning consumer choice os restricted due to a lack of alternatives
• finical ability of monopolies can provide stable employment for workers
• Intellectual Property Rights means that consumers will be protected as they will have better quality and innovative products for a set period of time.
• Intellectual Property Rights, such as copyrights and patents allow firms security of exclusive use of their ideas and products for a limited time
• natural monopolies may receive subsidies to ensure efficiency and increase output
• a monopsony is where a single-buyer dominates a market
• a monopsony can act as a price maker and drive down prices, which can be exploiting suppliers, but if these low costs are passed on to consumers this is beneficial
• natural monopolies have huge fixed start up costs/ fixed costs/ infrastructure cost
• enormous potentials for economies of scale in natural monopolies, so a high quantity needs to be outputted
• in a natural monopoly, competition would result in wasteful duplication of resources and inefficient allocation of resources
• the green area demonstrates the losses made by the business after producing allocatively and productively efficient - therefore the government will provide subsidies

  
• natural monopolies provide necessary goods
• monopolies benefit from cross subsidisation for loss making goods/services
• monopolies are allocatively inefficient as prices rise and consumer surplus becomes smaller
• productive inefficiency as the firm does not produce on the lowest point on the AC curve
• X-inefficieny occurs as there is low competition, which leads to complacency
• monopolies can be regressive on low income families
• pure monopolies have no competition
• different examples of competition

  improved products, advertising and promotion, improved quality, wider product ranges
• governments aim to encourage competition to encourage firms to produce efficiently in the LR and set prices that are fair to consumers