What Is Monopoly? - Economics Exam Guide

Econ Exam Guide

Monopoly

What is Monopoly?
There is only one firm producing a good or service with no close substitutes for the good or service sold and there are barriers to entry that prevent competing firms from entering the market.

Market Power/ Three features of Monopoly?
1. No close substitutes:
A monopoly is an industry that there is only one producer which produces a good or service for which no close substitute exists. For example, MTR is the only underground railway service provider in the city.
2. Entry barrier:
A monopoly is protected from competition by a barrier preventing the entry of new firms.
3. Price setter:
A monopoly is a price setter because the demand for the monopoly’s output is the whole market demand.

What is different between a natural monopoly and a legal monopoly?
A legal monopoly is a market in which competition and entry are restricted by the granting of a public franchise, government license, patent and copyright.
And a natural monopoly is a market in which one firm can supply the entire market at a lower price than two or more firms can.

What is single-price Monopoly and Price discrimination Monopoly?/ or will ask their difference.
There are two types of monopoly price-setting strategies:
A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers.
Price discrimination is the practice of selling different units of a good or service for different prices.

With the aid of a diagram, explain how a Single-Price Monopoly’s Output and Price Decision
When Price > Average cost , Economic profit > 0.
A monopoly produces that output Q* at which MR=MC and sets the price P* at which it can sell that quantity. As the price is higher than average cost, the firm can earn an economic profit in the short run.

Price Discrimination
Price discrimination is the practice of selling different units of a good or service for different prices.
To be able to price discriminate, a monopoly must: 1. Identify and separate different buyer types 2. Sell a product that cannot be resold
Prices differences that arise from cost differences are not price discrimination.

Price discrimination converts consumer surplus into economic profit.
A monopoly can discriminate: 1. among units of a good. Quantity discounts are an example. 2. among groups of buyers.

To be able to price discriminate, what must a monopoly do?
Identify and separate different buyer types; Sell a product that cannot be resold.

Production and cost

What are variable and fixed production factors?
A fixed production factor is a production factor which do not change with outputs.
A variable production factor is a production factor which changes with outputs. Its quantities are positively related with outputs.