Monopolies and the Allocation of Resources

beth2384
Mind Map by beth2384, updated more than 1 year ago
beth2384
Created by beth2384 over 6 years ago
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A Levels Economics (Unit 1, 4 Market Failure) Mind Map on Monopolies and the Allocation of Resources, created by beth2384 on 01/03/2014.
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Monopolies and the Allocation of Resources
1 For markets to function well there must be a high level of competition
1.1 However, often there is a concentration of power on just a small number of firms, this can lead to market failure
1.1.1 A 'pure' monopoly exists when just one firm supplies the market
2 Problems of monopolies...
2.1 Firms can earn higher profits in spite of not producing goods and services that consumers value most
2.1.1 No incentive to produce products most valued by consumers as the firm has a high level of control
2.1.1.1 Consumers don't have the option to switch to an alternative so resources are not allocated according to consumer wants
2.1.1.1.1 The market has failed
2.2 Goods and services made are determined by the firms and not the conmsumers
2.2.1 Consumer sovereignty has been partially replaced by producer sovereignty
2.3 Firms not obliged to produce at lowest possible cost
2.3.1 Monopolists can restrict output in order to raise prices
2.3.1.1 No incentive to cut costs as there are no competitors forcing them to
2.3.1.1.1 Monopoly firms are unlikely to be productively efficient, hence a market failure
2.4 They may be less efficient
2.4.1 If they believe they have a protected market they may be less inclined to spend money on research and improved management
2.4.1.1 These inefficiencies can lead to a waste of scarce resources
3 Benefits of monopolies...
3.1 1 Research and Development
3.1.1 large firms with large profits are in the position to allocate some profits to fund capital investment spending and research and development projects
3.1.1.1 Positive spillover effects including a faster pace of innovation and the development of improved products for consumers
3.1.1.1.1 e.g. in telecommunications and pharmaceuticals
3.2 2 Exploitation of economies of scale
3.2.1 Because monopoly producers supply goods and services on a large scale they may achieve economies of scale.
3.2.1.1 This leads to a fall in average costs of production
3.2.1.1.1 Gains in productive efficiency may be passed onto the consumer through lower prices
3.2.1.1.1.1 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
3.2.1.1.1.1.1 This is the 'natural monopoly' situation
3.3 3 Monopolies and international competitiveness
3.3.1 The UK economy needs multinational companies operating on a scale large enough to compete in global markets
3.3.1.1 A firm can enjoy domestic monopoly power but still face competition in overseas markets
3.3.1.1.1 e.g. Corus, the UK/Dutch owned steel manufacturer
4 Causes for markets becoming more competitive in recent years
4.1 Technological change
4.1.1 rise of e-commerce and the internet
4.2 Globalisation
4.2.1 fresh low-cost competition from emerging market economies such as China and India
4.3 Deliberate government poloicies
4.3.1 want to open up markets and give new businesses the right to compete (e.g. in postal services, car retailing and telecommunications)
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