6a. Monopoly, Cartels, Monopolistic Competition Flashcards
Are monopolies price takers?
NO!
Monopolies are not price takers like competitive firms
Monopoly output is the _______________
Monopoly output is the market output
Monopoly demand curve is the _______________
Monopoly demand curve is the market demand curve
What is the profit maximisation quantity for a monopolist?
MC = MR
If MC=MR is the profit max quantity for both PC as well as monopolists, where is the key difference?
MR is NOT FLAT like in PC !!!
How do you calculate the MR function?
take the supply function, eg. p = 18-Q
Calculate TR by multiplying this by Q
(18 - Q) * Q = (18Q - Q^2)
Calculate the MR by finding the derivative of TR
(18Q - Q^2) = 18 - 2Q
As this is MR, just make this equal the given MC !
What does the MR depend on?
The price elasticity of demand!
What is the PED of MR in perfect competition?
Horizontal MR..
Perfectly elastic demand!
In what part of the demand curve would the monopolist NOT produce?
The monopolist will NEVER produce beyond where MR becomes negative.
What does this diagram show?
q where MC = MR,
plotted up to find price,
plotted down from same point onto the AC
-> 60pi (profit)
What is the shutdown decision for a monopolist?
SAME as PC firms,
a monopoly should shut down in the monopolist’s price is less than its AVC.
What is the definition of “market power”
Market power is the ability of a firm to charge a price above marginal cost and earn a positive profit
What is the “market power” related to?
Market power is related to the price elasticity of demand
! The more elastic the demand curve, the less a monopoly can raise its price above MC without losing sales (and vice versa). !
What does this function show?
This formula is often used to determine the optimal price p in relation to the marginal cost MC when the elasticity of demand is known.
where:
p = price
e = PED
What is the lerner index?
The Lerner Index is a measure of a firm’s market power and its ability to set prices above marginal cost
What is the equation for the Lerner Index?
p - MC / p
Why would the demand curve become more elastic? (less market power)
Demand becomes more elastic (which implies less market power for the firm):
- 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 the firm
Does a monopolist generate DWL?
YES!
The competitive equilibrium has none, but in this case the firms do not operate where MC = D, rather, where MC = MR
Why are some markets monopolized?
- Cost advantage over other firms
- Government created monopoly
What are some sources of cost advantages?
- Control of an essential facility
- Use of superior technology or a better way of organizing production
- Protection from imitation through patents or informational secrets.
Monopolist can sell at a lower price than other firms; other firms do not enter the market.
What is a Natural Monopoly?
A market has a natural monopoly if one firm can produce the total output of the market at lower cost than several firms could.
-> Examples: public utilities such as water, gas, electric, and mail delivery.
Natural monopolies have __________________________
Natural monopolies have economies of scale for all output levels.
- HIGH fixed costs
- LOW and consistent marginal costs
Are the fixed costs of natural monopolies high?
YES
What does this DIG show?
two firms that produce 6 units, have an AC of 20, whereas the natural monopoly can produce 12 units at 15 AC… so will always beat multiple firms
