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Questions and Answers
What is a defining characteristic of pure monopoly?
What is a defining characteristic of pure monopoly?
- There is only one seller of a unique product. (correct)
- The seller is a price taker.
- The product has multiple close substitutes.
- There are many sellers of a commodity.
Which of the following factors may result in the establishment of a monopoly?
Which of the following factors may result in the establishment of a monopoly?
- High competition among firms.
- Low barriers to entry.
- Excess supply of raw materials.
- Increasing returns to scale. (correct)
How does a monopolist influence the market price?
How does a monopolist influence the market price?
- By relying on the prices set by competitors.
- By setting a fixed price that cannot be changed.
- By adjusting the supply to suit market conditions. (correct)
- By having total control over the market demand.
What does the lack of close substitutes for a monopolist's product imply?
What does the lack of close substitutes for a monopolist's product imply?
What typically serves as a barrier to entry for new firms in a monopoly?
What typically serves as a barrier to entry for new firms in a monopoly?
Why is a monopolist referred to as a price maker?
Why is a monopolist referred to as a price maker?
A monopolist's control over the supply of raw materials can lead to what outcome?
A monopolist's control over the supply of raw materials can lead to what outcome?
What effect do barriers to entry have on competition in a monopoly?
What effect do barriers to entry have on competition in a monopoly?
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Study Notes
Definition of Pure Monopoly
- Characterized by a single seller for a commodity without close substitutes.
- Positioned opposite perfect competition in market structure.
Causes of Monopoly
- Increasing Returns to Scale: Larger firms can produce at a lower average cost, discouraging new entrants.
- Control Over Raw Materials: A monopolist may dominate critical materials essential for production.
- Patents: Legal protections that grant exclusive rights to manufacture or sell a product.
- Government Franchise: Legal monopolies granted by governments to ensure exclusive service in specific industries.
Features of Pure Monopoly
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Single Seller:
- Presence of only one producer, leading to significant market influence.
- Influences market price through supply changes, but price still determined by demand and supply forces.
- Monopolist referred to as a "Price Maker."
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No Close Substitutes:
- The product offered lacks comparable alternatives.
- Consumer demand is relatively inelastic, as there are no close substitutes to switch to if prices change.
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Barriers to Entry:
- New firms face significant challenges entering the market.
- Barriers can arise from various factors such as high startup costs, regulatory requirements, and established brand loyalty among consumers.
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