5. Chapter 15 Flashcards
What type of firm is a price taker and what type is a price maker?
What is a monopoly?
Competitive firm is a price taker
Monopoly firm is a price maker
Graph of each on page 305
Monopoly is a firm that is the sole seller of a product without close substitutes
Monopoly remains the only seller because other firms cannot enter the market and compete with it
Monopoly increases slice of pie for producer and shrinks it for consumer
What are the three barriers to entry of a monopolistic market?
- Monopoly resources- key resource is owned by s single firm
- Government regulation- government gives a single firm the exclusive right to produce some good or service (patent or copyright laws)
- The production process- a single form can produce output at a lower cost than can a large number of producers
What is the pro and con to laws governing patents and copyrights?
They increase incentive for creative activity
The benefit is offset by the cost of monopoly pricing
What is a natural monopoly?
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
Arises when there are economies of scale over the relevant range of output
Graph on page 303
What are club goods?
Goods that are excludable but not rival in consumption
Example is a bridge used so infrequently that it is never congested, bridge is excludable because a toll collector can prevent someone from using it
What is total revenue, average revenue, and marginal revenue?
Total- price times quantity sold
Average- total revenue divided by the quantity sold
Marginal- change in total revenue divided by quantity sold
Table on page 306 and graph on page 307
How is a monopolists marginal revenue related to the price of its good?
A monopolists marginal revenue is always less than the price of its good
What are the two effects on total revenue when a monopoly increases the amount it sells?
- The output effect- more output is sold, so Q is higher which increases total revenue
- The price effect- the price falls, so P is lower, which tends to decrease total revenue
Marginal revenue is negative when the price effect in revenue is greater than the output effect
When can the firm increase profit by producing more units?
When can the firm increase profit by reducing production?
Can increase profit by producing more units when the marginal cost is less than marginal revenue
Q1 on graph on page 308
Can increase profit by decreasing production when the marginal cost is greater than the marginal revenue
Q2 on graph on page 308
Qmax on graph is the profit maximizing quantity of output where marginal revenue curve and marginal cost curve intersect
Why does a monopoly not have a supply curve?
Because in monopoly the form sets the price the same time it sets the quantity to supply
What is the profit maximizing price for a monopoly?
It is the point on the demand curve that have the same quantity as the profit maximizing quantity of output point where the marginal revenue and marginal cost curves intersect
Point B on graph on page 308
How are price and marginal cost related in competitive markets and in monopoly markets?
In competitive markets- price equals marginal cost
In monopolized markets- price exceeds marginal cost
How do you find the profit for a monopoly using a graph and equation?
Profit=(P-ATC) x Q
Graph on page 310
Where is the socially efficient quantity found on a monopoly graph?
The socially efficient quantity is found where the demand curve and the marginal cost curve intersect
Figure on page 313
The monopolist always produces less than the socially efficient quantity of output
What is deadweight loss in monopoly on a graph?
It is the measure of the inefficiency of of monopoly
Area between the demand curve and marginal cost curve which is the total surplus lost because of monopoly pricing
Figure 15.8 page 313
