06 Monopoly Flashcards
Imperfectly competitive firms..
Have some ability to set their own price: they are price setters
Monopoly
Has only one seller with no close substitutes
Monopolistic competition
Has many firms producing slightly differentiated products that are reasonably close substitutes
Oligopoly
Has a small number of large firms producing products that are close substitutes
Characteristics of a Monopoly
One firm, complete flexibility on price, difficult or impossible entry/exit, unique product, possible economic profits, make decisions on P & Q
Market power
A firm’s ability to raise its price without losing all its sales, comes from factors that limit competition
Imperfectly Competitive Firm Curve?
Downward sloping demand curve, picks P and Q on the demand curve
Perfectly Competitive Firm Curve?
Horizontal demand curve, picks only Q on the demand curve
Source of Market Power 1 (excl..)
Exclusive control over inputs
Source of Market Power 2 (pat..)
Patents and copyrights (patent gives owner right to exclude other from using invention for 20 years, copyright grants creator of original work exclusive rights to determine whether it may be used by others for author’s lifetime plus 50-70 years)
Source of Market Power 3 (govt…)
Government Licences
Source of Market Power 4 (econ..)
Economies of Scale
Source of Market Power 5 (net..)
Network economies (occurs when the value of product increases as number of users increases)
Total cost increases..
As output increases
Average total cost decreases…
As output increases
Marginal revenue
Change in total revenue from a one-unit change in output (less than price)
Marginal revenue on graph
Same intercept as straight line demand curve
Twice the steepness
Below demand curve
Profit is maximised..
At level of output where marginal cost equals marginal revenue
If P > ATC
Firm earns profit
If P < ATC
Firm suffers loss
Natural Monopoly
Monopoly that arises from economies of scale (as output falls, average cost will rise)
Perfect price discrimination
Practice of charging each buyer exactly his or her reservation price.
Price discrimination
Brings the level of output closer to the socially optimal quantity.
Network economies
Exist when the value a consumer places on a good increases when other consumers have the same or compatible goods.
Cost-plus regulation
A method of regulation under which the regulated firm is permitted to charge prices that cover the explicit cost of production plus a markup to cover the opportunity cost of the resources supplied by the firm’s owners.
