2268471
Description
Flashcards by Amardeep Kumar, updated more than 1 year ago
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Created by Amardeep Kumar
almost 10 years ago
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| Question | Answer |
| Define monopoly power. | The extent to which a supplier is able to influence the price charged to its consumers in the market. |
| In theory, how much market share is required to have monopoly power? | In theory, monopoly power is having 100% market control e.g. water companies who are the sole suppliers in their area. |
| In practice how much market share is required to have monopoly power? | In practice - A firm is considered to have a monopoly position if it has 25% of the market share. This is because there aren't many firms who dominate the market completely. e.g. Microsoft, as they have a dominant position in the PC market but not complete control. |
| Why is the demand for monopoly goods inelastic? | Because there are a few acceptable consumer substitutes. Consequently, the supplier can charge a higher price to gain a significantly higher revenue. The greater the market share, the greater the inelasticity. |
| What are the four sources of monopoly power? | Legal barriers, economies of scale, unfair competition and natural barriers. |
| How can legal barriers help high cost firms operate efficiently? | If there is a legislation to limit the number of firms in a market, then they will be able to operate more efficiently e.g. by exploiting economies of scale as they get larger, they can increase productivity and reduce production costs. |
| How do economies of scale help a business as it grows in size? | The effect of these economies is that they allow the firm to increase their output while reducing their average costs of production, because the increase in output is greater than the increase in production costs. |
| What are the economies of scale? | Technical, specialisation, purchasing, financial, risk-bearing and marketing. |
| What is the Technical economy of scale? | A firm is able to purchase capital equipment which is modern, up-to-date and advanced and more cost effective. |
| How is specialisation an economy of scale? | It the result of division of labour of a large workforce, resulting in increased productivity. |
| What is the Purchasing economy of scale? | A larger firm has the benefits of bulk buying at lower costs per unit. |
| What is the financial economy of scale? | These are lower costs of capital charged by financial providers, lower interest rates charged by banks etc. |
| How is risk-bearing an economy of scale? | A firm has the finance and resources to take risks e.g. investing in new products and markets. |
| How can marketing be used as an economy of scale? | Larger firms are able to afford larger scale marketing e.g. TV advertising and internet advertising. |
| How have some businesses used unfair competition to help maintain their dominant position in the market? | -Supermarkets have been accused of forcing suppliers to accept lower prices or lose their contract -Microsoft have threatened computer manufacturers to install their software or suffer consequences. |
| What are natural barriers used in maintaining monopoly power. | Natural barriers occur when firms legally manage to gain control of all the resources for production, preventing any competition. e.g. Oil companies gaining exploration rights of all the oil in the area. |
| What are the advantages of monopoly power? | -Monopolies can increase productive efficiency exploiting economies of scale. -Monopolies can increase allocative efficiency by charging lower prices to their customers by avoiding duplication. -They have the resources available to be more inventive and innovative. |
| What are the disadvantages of monopoly power? | Barriers to entry means a lack of choice / Loss of allocative efficiency - higher prices compared to in a competitive market / loss of productive efficiency - lack of competition means less incentives to lower prices / Diseconomies of scale as a business grows in size. |
| What sort of diseconomies of scale may a large firm experience? | Communication may become harder and controlling operations will become more challenging. Workers may become less productive, causing production to fall and average costs start to rise. The firm then has to raise prices to maintain profits, which leads to lower demand. |
| How is monopoly an example of market failure? | Loss of allocative efficiency - consumers pay more than they would in competitive markets. Loss of productive efficiency - less competition means less incentives to lower prices. |
| When is economic efficiency maximised? | When one individual can be made better off, without making another worse off. |
| What does it mean when a business is productively and allocatively efficient? | Productively efficient - they use all resources available and keep production costs minimum. Allocatively efficient - goods are affordable to consumers and so sold for the lowest possible price. |
| What is factor immobility? | A factor of production is not working to its full potential. |
| How are the factors of production immobile? | Land - requires time and planning permission Labour - unemployment and lack of productivity Capital - depreciation and lack of use Enterprise - risks don't always pay off. |
| Give an example of market imperfection leading to market failure. | If labour is not maximised, unemployment exists. These people will not contribute to the economy but will benefit from welfare. This has an opportunity cost - spending on education which is a better alternative. |
| What is imperfect knowledge and why does it exist? | Economic agents lack the necessary information to make rational decisions. Therefore, they ignore the external benefits of merit goods and external costs of demerit goods. |
| What is wealth and what are the 3 basic sources? | This is the result of income, which is attained from 3 basic sources: Employment, Welfare and Investment. |
| What are the 2 forms of wealth? | 1. Physical - tangible possessions such as property, cars and jewelry. 2. Monetary - monetary investments such as cash, bank accounts, shares and pensions. |
| What can cause the rise of one's wealth? | 1. Income rising from work 2. Rising value of investments |
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