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Market Structures

Monopoly: Monopoly and its underpinning assumptions

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on Monopoly and its underpinning assumptions.

What you need to know

Answer each one before you reveal it.

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Key term

What is a pure monopoly?

Key term

On what assumptions does the monopoly model rest?

Key term

Why does the assumption of high barriers to entry matter so much in the monopoly model?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Define monopoly.

    Model answer

    A market structure dominated by a single supplier of a good or service that has no close substitutes and is protected by high barriers to entry.

  2. 2

    What is a pure monopoly?

    Model answer

    A market supplied entirely by one firm, so that the firm's own demand curve is the demand curve for the whole industry.

  3. 3

    On what assumptions does the monopoly model rest?

    Model answer

    One dominant seller, no close substitutes, high barriers to entry, profit maximisation, and imperfect information among consumers.

  4. 4

    Why does the assumption of high barriers to entry matter so much in the monopoly model?

    Model answer

    Without them new firms would enter and compete the supernormal profit away, so the monopolist's ability to keep earning that profit depends entirely on entry being blocked.

  5. 5

    Why is a monopolist called a price maker, and what still constrains it?

    Model answer

    It can choose the price because it supplies the whole market, but the downward-sloping demand curve it faces constrains it, since it must then accept whatever quantity consumers are willing to buy at that price.

  6. 6

    Why does marginal revenue lie below average revenue for a monopolist?

    Model answer

    To sell an extra unit the monopolist must cut the price on every unit it sells, so the revenue gained from the extra unit is less than the price it is sold for.

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