[1] Monopolies Flashcards
A Monopoly is ….
A monopoly is the only supplier of a good for which
there is no close substitute.
In a perfect competitive market: firms are price _____
• A monopolist instead is a price _______. It means that:
• Monopoly ____ is the ___ ____
• Monopoly ____ curve is the market ____ curve
• Monopolists given the market demand, can ….
• Because demand is downward sloping, monopolists set
price above____ _____ to ___ ____.
• Like all firms, monopolies maximize profits by setting
price or output so that ___ _____ equals ___ ____
takers
maker
output, market output
demand, demand
Monopolists given the market demand, can set their
own price
marginal cost, max profits
marginal revenue (MR), marginal cost (MC)
What is the necessary condition for profit maximization ? (first derivative)
The sufficient condition for profit maximization (second
derivative):
First derivative/ FOC of dπ(Q) = dTR(Q) – dTC(Q) = 0
SOC: π(Q) = TR(Q) – TC(Q) < 0
A firm’s MR curve depends on its ____ ____.
___ ___ is also downward sloping and lies ___ D.
p(Q) is the ____ ____ function
demand curve
Marginal Rev, below
inverse demand
MR (Q) =
=
=
[CHAIN RULE]
= dR (Q) /d (Q)
= dp(Q) x Q / dQ
= p(Q) + (dp(Q) / dQ) xQ
or simply = p + (dp/dQ) x Q
The marginal revenue at any given quantity depends on the ___ _____ curve (the ____) and the___ ____ ___ ____.
PED equation
inverse demand, price, price elasticity of Demand
Elasticity of demand:
ε = dQ/dP x P/Q < 0
MR function state in terms of elasticity
slide 14
MR = p(1 + 1/ε) = MC
Where demand hits the vertical axis, __=__ and
demand is ___ ____.
• Everywhere that MR > 0, demand is _____ .
• Everywhere that MR < 0, demand is _____
MR=P, perfectly elastic
elastic
inelastic
work thru x2 Examples on slides
slides 15-17
The _____elastic the demand curve, the ______a monopoly can _____ its price without losing sales
more more raise
The Lerner Index (or price markup) is an index of firm
______ _______. It is also another way to examine how
_______ affects a monopoly’s price relative to its MC.
• The Lerner Index ranges from __ to __ for a profit maximizing firm.
• ______ _____ firms have a Lerner Index of 0.
• The Lerner Index gets closer to 1 as a firm has ____ ____ ____ (and faces less ____ demand).
market power elasticity 0,1 Perfectly competitive more market power, elastic
Formula for Lerner Index ( algebraic and words)
(p - MC)/P = -1 / ε
(price - MC) / Price
Elasticity of the market demand curve depends on
consumers’ ____ and ____.
• Demand becomes more elastic (which implies less
market power for the firm) when … x3
the firm
• As a profit-maximizing monopoly faces more elastic
demand, it must lower its _____.
• Example:
tastes, options
• as better substitutes for the firm’s product are
introduced
• as more firms enter the market selling a similar product
• as firms that provide the same service locate closer to
price
McDonald’s
a Monopoly sets price above \_\_\_\_ \_\_\_\_\_ (and above the \_\_\_\_ \_\_\_\_) • causes consumers to buy \_\_\_ the \_\_\_\_\_ level of output • generates a \_\_\_ \_\_\_\_ Show this graphically
marginal cost, comp price
below comp
DWL
Slide 25
how to calc the tax incidence on consumers?
x2 Ways that Taxes (_____ ___ and ____) affect a monopoly market differently to a competitive market:
ad valorem, specific
1.Tax incidence on consumers (the change in the
consumers’ price divided by the change in the tax) can
exceed 100% in a monopoly market but not a
competitive market.
2.If tax rates α (ad valorem) and τ (specific per unit of
product) are set so that the after-tax output is the
same with either type of tax, the government raises the
same amount of tax revenue in a competitive market
using either type of tax, but raises more revenue
using an ad valorem tax than a specific tax under
monopoly.
