Monopoly & Diagrams

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12 Terms

1

What are possible BTE in a monopoly?

  • EOS = low average costs due to high output

  • Natural monopoly = upfront investment/fixed cost may be large making it unprofitable for other companies

  • Legal and technical barriers = patents, copyrights for technology

  • Brand loyalty = if there have always been one firms, consumers may be reluctant to switch

  • Ownership/control of resources

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2

Difference between AR and MR in monopoly

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3

Monopoly diagram

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4

• Consumer surplus: what is it?

Consumer / Producer Surplus

• Consumer surplus is quite easy to understand, since it’s the difference between how much someone is willing to pay for a given quantity of goods, an how much they actually pay.

•So if I would pay £10 and I pay £7 , I keep £3 to spend elsewhere and thus increase my welfare. So C S is a gain to society

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5

Producer surplus:

  • Producer surplus is the difference between the price the producer is paid and the cost of production.

  • So If a producer could S at £6 but the Price is £11 they get an extra £5 of profit. Again a gain to society

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6

Draw the diagram of monopoly, including the deadweight loss to society

  • so monopolies take surplus away from consumers and also reduces surpluses ( welfare) to society

<ul><li><p>so monopolies take surplus away from consumers and also reduces surpluses ( welfare) to society</p></li></ul>
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7

What are the negative effects on consumers/ Govt / Economy of monopolies?

  • High Prices / low output (diagram)

  • Uses power to restrict market , stop competition by barriers to entry.

  • Poor quality due to no competition.

  • X – Inefficiency. – It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms.Therefore the AC curve is higher than it should be.

  • P Discim

  • Consumer surplus fall

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8

What are the positive effects on consumers/ Govt / Economy of monopolies?

• Secure jobs . Less likely to go under. But pushes small firms out (loses jobs)

• High supernormal profits reinvested into the firm for better goods in future (help consumers). Competitive firms can’t do this. Research & Development In many industries which require substantial investment – a competitive industry with many small firms would be unsuitable.

• High Corporation tax ( but some avoid eg Starbucks)

• Econ of Scale.... Lower Prices ??? or higher profits.(ME SHOW THIS)

• Modern economy... give people what they want ....ie massive tesco.

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9

What is natural monopoly?

  • occurs when the most efficient number of firms in the industry is one.

  • A natural monopoly will typically have very high fixed costs meaning that it is impractical to have more than one firm producing the good.

  • An example of a natural monopoly is tap water.

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10

Examples of Natural Monopolies

• Gas network

• Electricity grid

• Railway infrastructure

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11

Draw a diagram for natural monopoly

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12
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