3.4.5 Monopoly

What is a monopoly?

A market structure where there is only one firm in the industry.

How does a firm's demand curve relate to the market demand curve in a monopoly?

The firm's demand curve is the same as the market's demand curve.

What is the relationship between demand and average revenue in a monopoly?

Demand is also equal to average revenue.

At what point does a monopoly operate to maximize profit?

A monopoly operates where marginal cost (MC) equals marginal revenue (MR).

What is a key characteristic of products in a monopoly?

There are no substitute products.

What market power does a monopoly firm have?

The firm has complete market power to set prices and control output.

What is the primary aim of a monopoly?

To maximize profits.

What type of profits does a monopoly make?

Supernormal profits, as it produces where average revenue (AR) is greater than average cost (AC).

What are high barriers to entry in a monopoly?

Obstacles that prevent other firms from entering the industry.

What is the profit-maximizing equilibrium condition for a monopoly?

Profit maximization occurs when marginal cost (MC) equals marginal revenue (MR).

What does MC represent in the context of a monopoly?

MC is the cost of producing one more unit.

What does MR represent in the context of a monopoly?

MR is the revenue received from selling one more unit.

What should a firm do if MR is above MC?

The firm should increase output.

What should a firm do if MC is above MR?

The firm should reduce output.

What is price discrimination?

A firm charging different prices to different consumers for the same product.

What factors determine the price charged in price discrimination?

The consumer's ability to pay and willingness to pay.

What is third-degree price discrimination?

When a firm identifies groups of consumers with similar characteristics and charges different prices based on demand elasticity.

What is an advantage of price discrimination for monopolists?

It transfers consumer surplus to producer surplus, increasing revenue.

What is a potential benefit for consumers under price discrimination?

Consumers could benefit from lower prices and increased consumption.

What are some costs associated with monopoly?

Removes competition, productively inefficient, allocatively inefficient, and x-inefficient.

What does allocative inefficiency mean in a monopoly?

It produces at a point where supply does not equal demand (S ≠ D).

What are the benefits of a monopoly?

Dynamic efficiency allows investment in R and D, economies of scale, natural monopoly efficiency avoids duplication of resources, cross-subordination of loss-making services