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We need to compare the price & output of a price setter (i.e. firm with market dominance) and price taker (i.e. firm with no market dominance).
Monopolist vs. Perfectly Competitive Firm

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What are the forms of government intervention?

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What are the forms of government intervention?

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Why is government intervention needed when a firm dominates the market?

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Why is government intervention needed when a firm dominates the market?

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Allocative Inefficiency in a market dominant firm

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Identify 3Cs
1. Command: Discuss whether
2. Concept: a firm dominates the market --> market dominance
3. Context: NIL
4. Condition: always necessary

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'Market dominance is the main factor determining the profitability of firms.'

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'Market dominance is the main factor determining the profitability of firms.'

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(a) Explain how market dominance can influence a firm's price and output decisions. [10]
(b) Discuss whether government intervention is always needed when a firm dominates the market. [15]

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How does market dominance affect price & output decisions?

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How does market dominance affect price & output decisions?

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A firm with market dominance faces a downward sloping demand curve. It can lower prices in order to sell more output or restrict output and sell at higher price.

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How are price and output determined?
We assume that all firms aim to maximise profits, hence they will produce at the output where MC=MR.

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Identify 3Cs
1. Command: Explain
2. Concept: market dominance; price and output decisions
3. Context: NIL

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What is market dominance?

Market dominance occurs when a firm has strong barriers to entry and/or there is imperfect knowledge in the market. The product sold is supplied by a single or few large sellers. As a result the sellers have substantial market share or control over supply and the market price.
Market dominance is often seen in a monopoly where it is the sole producer of the product with no close substitutes.

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'Market dominance is the main factor determining the profitability of firms.'

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'Market dominance is the main factor determining the profitability of firms.'

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(a) Explain how market dominance can influence a firm's price and output decisions. [10]
(b) Discuss whether government intervention is always needed when a firm dominates the market. [15]