Question

Please answer the two questions below separately:

1. Describe three different barriers to entry that could lead to monopoly power in an industry

2. Describe the circumstance(s) under which a monopolist could suffer an economic loss

Answer 1

1. The legal, technical, or market factors that deter or prohibit potential competitors from entering a market are barriers to entry. Barriers to entry, such as the cost of renting retail space, can vary from basic and easy to overcome to the highly restrictive. A finite number of radio frequencies, for example, are eligible for broadcast. Only new entrants will enter the market after an individual or company has acquired the rights to both of them. There are two kinds of monopoly, depending on the types of obstacles they manipulate for entry. One is a natural monopoly, where the barriers to entry are anything but a legal prohibition. The other is legal monopoly, where legislation forbids (or seriously restricts) competition.

2. Compared to perfectly competitive markets, monopolies are inefficient, since they charge a higher price and generate less production. The word to economic inefficiency is the reduction of deadweight. Since the monopolist pays a price that is greater than his marginal cost, there is no flexibility in allocation. Between the perfectly competitive production and the monopolistic production, society loses the field.

If the average expense is above average income, a monopolist may be a loss-making one. In this situation, the company's expense is higher than its sales, making it lose. The combined red and blue add up to price.