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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
Difference between AR and MR in monopoly
Monopoly diagram
• 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
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
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
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
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.
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.
Examples of Natural Monopolies
• Gas network
• Electricity grid
• Railway infrastructure
Draw a diagram for natural monopoly