Define the following terms and explain their importance to the study of economics.

Question

a. Pure monopoly
b. Barriers to entry
c. Patent
d. Natural monopoly
e. Sunk costs

Answer 1

a. A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes, and in which it is very hard or impossible for another firm to coexist. Although rare, monopoly is a useful model to study because of the insights it gives into imperfect competition behavior.b. Barriers to entry are attributes of a market that make it more difficult or expensive for a new firm to open for business than it was for firms already present in the market. Some examples of barriers include legal restriction on entry, patents, control of scarce resources, large sunk costs, technical superiority, and economies of scale.c. A patent is a privilege granted to an inventor, whether an individual or a firm, that for a specified period of time prohibits anyone else from producing or using that invention without the permission of the holder of the patent. During the life of the patent, the firm has a protected monopoly position. Thus, it serves as a barrier to entry.d. A natural monopoly is an industry in which advantages of large-scale production make it possible for a single firm to produce the entire output of the market at lower average cost than a number of firms each producing a smaller quantity. Most natural monopolies are regulated utilities.e. Sunk costs are financial investments of large amounts of money into the firm, which would take a considerable period of time to recoup. Thus, the need for large sunk investment serves to discourage entry into an industry and promotes monopoly.