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Microeconomics A level OCR
Market structures
monopoly
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Cards (65)
Monopoly
One firm, one seller dominating the market
Theoretical
extreme
of pure monopoly with 100% market share
Realistic
sense of monopoly power with at least
25
% market share (legal monopoly)
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Monopoly
characterists
Differentiated, unique products
High barriers to entry and exit
Imperfect information on market conditions
Profit maximizing firm producing where MR=MC
price makers
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Monopolist
's behaviour
1.
Downward
sloping demand (average
revenue
) curve
2. Marginal revenue
twice as steep as demand
curve
3.
Average
cost curve (smiley face)
4.
Marginal
cost curve (cuts AC at lowest point)
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Monopolist
produces
Where
MC
=
MR
(quantity q1)
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Price
Read from demand (
AR
) curve (
price p1
)
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At quantity q1,
monopolist
makes
supernormal
profits
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Monopolist
is not allocatively
efficient
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Monopolist
is not
productively
efficient
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Monopolist
may exhibit
X-inefficiency
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Monopolist has potential for dynamic efficiency through
reinvestment
of long-run
supernormal
profits
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Price
discrimination
When a firm charges
different
prices to different consumers for an
identical
good or service with no differences in costs of production
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Conditions for price discrimination
Firm has
price
making ability (
monopoly
power)
Firm has information to
separate
market into different segments based on
price
elasticity of demand
Firm can prevent
resale
(market seepage)
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Degrees
of price discrimination
First
degree
Second
degree
Third
degree
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First
degree price discrimination
Consumers are charged the exact price they are willing and able to pay, eroding all
consumer surplus
and turning it into
monopoly profit
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First
degree price discrimination
Turns
consumer surplus
into
monopoly profit
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Second
degree price discrimination (excess capacity pricing)
Firm with fixed capacity
lowers
prices to fill
excess
capacity and contribute towards fixed costs
Consumers who pay
lower
price for excess capacity gain
consumer surplus
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Firm has fixed capacity
It makes sense to lower prices to fill
excess capacity
and contribute towards
fixed costs
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Third
degree price discrimination
Firm
segments market into different price
elasticity
of demand groups and charges different prices to each group
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Firm segments market into different price
elasticity
of demand groups
Charges
higher
prices to inelastic demand group,
lower
prices to elastic demand group to maximize profits
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Pros of price discrimination
Greater
profits
for firm, potential for
reinvestment
and dynamic efficiency benefits
Some consumers benefit from
lower
prices (second and third degree)
Cross-subsidization of
loss-making
goods/services
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Cons
of price discrimination
Allocative
inefficiency
from prices above marginal cost
Potential to increase income
inequality
Anti-competitive
effects (third degree)
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The cons of price
discrimination
outweigh the pros, as the core issue of consumer
exploitation
is very significant
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Natural
monopoly
A
submerge
of monopoly theory, a brilliant
market structure
to investigate and analyze
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Natural
monopoly markets
Utilities (
water
distribution, gas,
electricity
distribution, internet distribution)
Rail
track providers
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Characteristics
of a natural monopoly market
Huge
fixed
costs, especially
startup
costs
Huge potential for economies of
scale
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Competition
is undesirable in a
natural monopoly
market
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How
a natural monopolist operates
1.
Profit maximization
by producing where
marginal revenue
equals marginal cost
2. Charging a price
higher
than the allocated efficient price, resulting in
supernormal
profits
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Regulator's response to a natural monopolist's
high
prices and
low
quantities
Regulates the
natural monopolist
to the allocated
efficient price
and quantity
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Regulating
a natural monopolist to the allocated efficient point
Results in the natural monopolist making
sub-normal
profits
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Many
natural
monopoly industries have
state-run
natural monopolies instead of private ones
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Private natural monopolists are often heavily
subsidized
and
regulated
to ensure they can continue producing
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Monopoly
A highly
concentrated
market with a
single
seller
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Cons of monopolies
Allocative
inefficiency
Prices
higher
than marginal cost
Lower
consumer surplus
Restrict
output
Restrict
choice
Quality
issues
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Allocative
inefficiency
Monopolies charge
higher prices
and produce
lower output compared
to competitive markets
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Productive
inefficiency
Monopolies do not minimise costs by operating at the
lowest
point of their
average
cost curve
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Monopolies are productively inefficient
They voluntarily
forego
economies of scale
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Monopolies
are productively inefficient</b><b>They suffer diseconomies of scale</b>
They suffer diseconomies of scale
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inefficiency
Monopolies allow for
waste
in their production process and complacency due to lack of
competitive
drive
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Monopolies cause
higher prices
This leads to income
inequality
, especially in
necessity
markets
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Pros
of
monopolies
Dynamic
efficiency
benefits
Ability to
exploit
greater economies of scale
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