3.4.5 Monopoly Flashcards
What are the characteristics of a monopoly?
- Single Seller: In a monopoly, there is only one firm or seller that dominates the entire market, with no close substitutes for its product.
- Unique Product: The monopolist typically offers a unique product that has no perfect substitutes. This lack of substitutes gives the monopolist significant control over pricing.
- High Barriers to Entry: Monopolies often maintain their dominant position due to high barriers to entry, which can include factors like patents, economies of scale, control over essential resources, and government regulations.
- Price Maker: A monopoly has the power to set the price of its product, and it faces a downward-sloping demand curve. It can choose the price and quantity of output to maximize its profits.
- Market Power: Monopolies have substantial market power, meaning they can influence market conditions, restrict output, and charge higher prices than would be possible in a competitive market.
- Long-Run Profitability: Monopolies can earn long-term economic profits because of their ability to set prices above their production costs.
Where is profit-maximizing equilibrium in a monopoly?
In a monopoly, the profit-maximizing equilibrium occurs where marginal revenue (MR) equals marginal cost (MC). The steps to find this equilibrium are as follows:
Determine the monopolist’s marginal cost curve (MC).
Calculate the marginal revenue curve (MR) by finding the change in total revenue resulting from a one-unit change in output.
Identify the quantity of output where MR = MC. This is the profit-maximizing quantity (Q).
Determine the price (P) at which the firm will sell this quantity by locating it on the demand curve.
The monopolist will maximize profit by producing Q* units of output and charging P* as the price.
What is Third Degree Price Discrimination?
What are the necessary conditions for success?
Third-degree price discrimination involves charging different prices to different groups of consumers based on their willingness to pay.
Necessary conditions include:
1. Market Segmentation: The firm must be able to segment the market into distinct groups with different price elasticities of demand.
2. Price Discrimination: The firm must have the ability to charge different prices to each segment.
3. No Arbitrage: Resale between segments should be prevented or discouraged.
What are the Costs and benefits to consumers and producers (of third degree price discrimination in a monopoly)?
Benefits: Producers can capture more consumer surplus, potentially increasing profits. Consumers in the less elastic group benefit from lower prices.
Costs: Consumers in the more elastic group pay higher prices, which can lead to reduced consumer surplus.
What are the costs and benefits of a monopoly?
Firms: Monopolies can earn significant profits in the long run, but they may face regulatory scrutiny and risk of government intervention.
Consumers: Consumers may face higher prices, limited choices, and reduced consumer surplus.
Employees: Monopolies may offer job security but can also reduce competition in labor markets, potentially impacting wages.
Suppliers: Suppliers may have limited bargaining power and face pressure to offer lower prices.
What is a natural monopoly?
State its key features.
A natural monopoly occurs when a single firm can efficiently serve the entire market due to significant economies of scale. Key features include:
1. High fixed costs relative to variable costs.
2. Declining average total cost as production scales up.
3. It is often found in industries like utilities (water, electricity) and infrastructure (railways, telecommunications).
4. Natural monopolies can benefit consumers by providing services at lower costs than multiple competing firms would achieve, but they require regulation to prevent potential abuse of market power.
