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Market Structures

Monopoly: Comparing monopoly with perfect competition

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on Comparing monopoly with perfect competition.

What you need to know

Answer each one before you reveal it.

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Key term

Name the three degrees of price discrimination and state what distinguishes each.

Numbers

A monopolist maximises profit at 500 units, charging £20 per unit, with an average total cost of £14. Calculate its supernormal profit.

Key term

How do a monopolist's price and output compare with those of a perfectly competitive industry facing the same costs?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    A monopolist maximises profit at 500 units, charging £20 per unit, with an average total cost of £14. Calculate its supernormal profit.

    Model answer

    Supernormal profit = (£20 − £14) × 500 = £3,000.

  2. 2

    How do a monopolist's price and output compare with those of a perfectly competitive industry facing the same costs?

    Model answer

    The monopolist restricts output below the competitive level and charges a price above it.

  3. 3

    Why is a monopolist allocatively inefficient?

    Model answer

    At its profit-maximising output the price exceeds marginal cost, so consumers value extra units by more than they would cost to produce, yet those units are not made.

  4. 4

    Why is a monopolist unlikely to be productively efficient?

    Model answer

    Its profit-maximising output does not generally coincide with the lowest point of its average cost curve, so it does not produce at minimum cost per unit.

  5. 5

    What is the welfare effect of monopoly pricing compared with the competitive outcome?

    Model answer

    A deadweight welfare loss arises from the output that is never produced, and some of the consumer surplus that remains is transferred to the monopolist as profit.

  6. 6

    Define price discrimination.

    Model answer

    Charging different prices to different consumers for the same product, where the difference in price does not reflect a difference in the cost of supplying them.

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