461509
Monopolies and the
Allocation of Resources
- For markets to function well
there must be a high level of
competition
- However, often there is a
concentration of power on
just a small number of firms,
this can lead to market failure
- A 'pure' monopoly exists
when just one firm
supplies the market
- A 'pure' monopoly exists
when just one firm
supplies the market
- However, often there is a
concentration of power on
just a small number of firms,
this can lead to market failure
- Problems of monopolies...
- Firms can earn higher
profits in spite of not
producing goods and
services that
consumers value most
- No incentive to produce products
most valued by consumers as the
firm has a high level of control
- Consumers don't have the option
to switch to an alternative so
resources are not allocated
according to consumer wants
- The market
has failed
- The market
has failed
- Consumers don't have the option
to switch to an alternative so
resources are not allocated
according to consumer wants
- No incentive to produce products
most valued by consumers as the
firm has a high level of control
- Goods and services made
are determined by the firms
and not the conmsumers
- Consumer sovereignty
has been partially
replaced by producer
sovereignty
- Consumer sovereignty
has been partially
replaced by producer
sovereignty
- Firms not obliged to produce
at lowest possible cost
- Monopolists can restrict output
in order to raise prices
- No incentive to cut costs as
there are no competitors
forcing them to
- Monopoly firms are unlikely
to be productively efficient,
hence a market failure
- Monopoly firms are unlikely
to be productively efficient,
hence a market failure
- No incentive to cut costs as
there are no competitors
forcing them to
- Monopolists can restrict output
in order to raise prices
- They may be less efficient
- If they believe they have a
protected market they may
be less inclined to spend
money on research and
improved management
- These inefficiencies can lead
to a waste of scarce resources
- These inefficiencies can lead
to a waste of scarce resources
- If they believe they have a
protected market they may
be less inclined to spend
money on research and
improved management
- Firms can earn higher
profits in spite of not
producing goods and
services that
consumers value most
- Benefits of monopolies...
- 1 Research and Development
- large firms with large profits are
in the position to allocate some
profits to fund capital investment
spending and research and
development projects
- Positive spillover effects including
a faster pace of innovation and
the development of improved
products for consumers
- e.g. in telecommunications
and pharmaceuticals
- e.g. in telecommunications
and pharmaceuticals
- Positive spillover effects including
a faster pace of innovation and
the development of improved
products for consumers
- large firms with large profits are
in the position to allocate some
profits to fund capital investment
spending and research and
development projects
- 2 Exploitation of economies of scale
- Because monopoly producers supply goods and services
on a large scale they may achieve economies of scale.
- This leads to a fall in average costs of production
- Gains in productive efficiency may be passed
onto the consumer through lower prices
- Some economists believe that in some industries
allowing a single firm to dominate due to the possibility of
significant economies of scale would be a good thing
- This is the 'natural monopoly' situation
- This is the 'natural monopoly' situation
- Some economists believe that in some industries
allowing a single firm to dominate due to the possibility of
significant economies of scale would be a good thing
- Gains in productive efficiency may be passed
onto the consumer through lower prices
- This leads to a fall in average costs of production
- Because monopoly producers supply goods and services
on a large scale they may achieve economies of scale.
- 3 Monopolies and international competitiveness
- The UK economy needs multinational companies operating
on a scale large enough to compete in global markets
- A firm can enjoy domestic monopoly power but
still face competition in overseas markets
- e.g. Corus, the UK/Dutch
owned steel manufacturer
- e.g. Corus, the UK/Dutch
owned steel manufacturer
- A firm can enjoy domestic monopoly power but
still face competition in overseas markets
- The UK economy needs multinational companies operating
on a scale large enough to compete in global markets
- 1 Research and Development
- Causes for markets becoming more competitive in recent years
- Technological change
- rise of e-commerce and the internet
- rise of e-commerce and the internet
- Globalisation
- fresh low-cost competition from
emerging market economies
such as China and India
- fresh low-cost competition from
emerging market economies
such as China and India
- Deliberate government poloicies
- want to open up markets and give new
businesses the right to compete (e.g. in
postal services, car retailing and
telecommunications)
- want to open up markets and give new
businesses the right to compete (e.g. in
postal services, car retailing and
telecommunications)
- Technological change
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