3. Monopolies

Name and define each type of monopoly.

1. Pure: Only 1 firm in industry.

2. Dominant: 40%+ market share.

3. Legal: 25%+ market share.

4. Natural

Give 6 features of a monopoly.

1. Single/ a few sellers.

2. Usually higher prices (price makers)

3. Differentiated products and advertising.

4. High entry + exit barriers.

5. Productively and allocatively inefficient.

6. Dynamically efficient.

Define dynamic efficiency.

The ability to reinvest profit into R&D, innovation, and capital to improve production and quality over time.

What profit is made by monopolies in the short and long run?

Short run: economic profit.

Long run: economic profit.

Draw a monopoly diagram.

Box = supernormal profit.

Vertical axis = cost

Horizontal axis = output

Give 4 disadvantages of a monopoly.

1. Little competition: little pressure to innovate.

2. Higher prices

3. Lower quantity supplied

4. Less choice for consumers

Give 4 advantages of a monopoly.

1. Economies of scale.

2. Dynamic efficiency

3. Few large firms may still fiercely compete.

4. Intellectual property rights: protect ideas + encourage new products.

What is a natural monopoly? Give an example.

A market that is most efficient where there is only one firm.

e.g. railway infrastructure.

Give 2 features of a natural monopoly.

- High fixed costs.

- Low marginal costs.

Draw a natural monopoly economies of scale diagram.

demand = 10,000 units.

If a firms produces this, they will get lowest average costs.

If 3 firms produce 3,000 units, they will have £17 average costs.

Optimal number of firms in industry is 1.

Name 7 barriers to entry.

1. Economies of scale.

2. Natural/ geographical barriers.

3. Brand loyalty through advertising.

4. Limit / predatory pricing.

5. Knowledge and expertise.

6. Legals patents for larger companies.

7. Network effects: e.g. using services many other use, like social media.

Name 5 barriers to exit.

1. Costly equipment and facilities: not easy to sell.

2. Redundancy cost to workforce.

3. Penalty fines: e.g. rental agreements.

4. Loss of reputation.

5. Clean up costs: e.g. closing factory, environmental hazards.