The lesson
Use the concept, then apply it to a real decision. Use this page as a fast, high-quality revision pass—not a wall of notes to memorise.
What creates market power?
A firm has market power when it can influence price or other market conditions. Barriers to entry help protect that power.
- Large sunk costs, legal protection, control of key inputs and network effects can deter entry.
- A market can have few firms yet remain contestable if entry and exit are credible.
- Market concentration alone does not prove harmful behaviour.
Efficiency and regulation
Use the correct efficiency concept for the argument being made.
- Allocative efficiency concerns price and marginal cost.
- Productive efficiency concerns producing at the lowest possible average cost.
- Dynamic efficiency concerns innovation and long-run improvement; regulation may protect consumers but can weaken investment incentives if badly designed.
Worked exam thinking
Worked example: natural monopoly
Prompt: Why might a regulator cap the price charged by a natural monopoly?
How to turn knowledge into marks
Use this answer route
For a focused explanation or short evaluation question on this topic:
- 1State the concept or relationship.
- 2Use the diagram, data or example accurately.
- 3Apply the impact to stakeholders.
- 4Evaluate the conditions and trade-offs.
Quick questions
Check your understanding
What is a barrier to entry?
Anything that makes it difficult or costly for a new firm to enter and compete in a market.
Can a monopoly be efficient?
It may achieve economies of scale or dynamic efficiency, though it can also restrict output and charge high prices.
What is contestability?
The extent to which potential entry and exit constrain existing firms, even if few firms are currently active.