Ch.10 Monopoly Flashcards
3 Barriers to Entry Monopolistic Industry
-
Technical barriers
sole ownership of resource
e.g. iOS -
Legal barriers
public franchise, license, patents, copyrights
e.g. salmon fishing -
Economic barriers
economies of scale
e.g. aircraft mfg.
___ industry is $ maker
- who set whatever $ it wishes
- can set either $ or Qty sold
Monopoly
doesn’t guarantee profitability
In Monopoly industry,
DD Curve is same w/ ___
AR Avg Revenue
In Monopoly industry,
Relationship btw
Curves of AR & MR
MR Crv Drops 2x
to AR Crv
slope of MR = 2 x AR
In Monopoly industry,
how to find
Max TR Total Revenue
Find where
Marginal Rev MR = 0
In Monopoly industry,
how to find
Max Tπ Total Profit
Find OUTPUT where
MR = MC
or
slope of TR = TC
or
TR - TC is greatest
In Monopoly industry,
how to find
Break-Even Output
AR = AC
TR = TC
In the graph,
when AR > AC
means Tπ __ 0
Tπ > 0
A Monopolist will
ONLY Produce More
when DD is
Elastic / Inelastic ?
Why?
Elastic
Monopolist can sell more only by lowering $
⇒ Elastic DD
5 Criticisms of Monopoly
- Make Economic Profits indefinitely
-
Productively Inefficient
output of
MR=MC<min. AC (econ. cap.)
⇒ Cost ↑ -
Allocatively Inefficient
Limit Qty Supplied for Max Profit
⇒ Qty ↓ - Unequal Income & Wealth
- Price Discrimination
How Producers attempt to capture Cx surplus by selling products to diff. ppl @ diff. $
Price Discrimination
2 Forms of
Price Discrimination
Dicriminations among
1. Units Purchased
- law of dinimishing marginal utility buyers don’t value units equally
- Cx buy additional units for lower $
- not relevant to cost of prod
- e.g. BOGO
2. Buyer Groups
- diff. Cx groups, diff. dd & value, diff. elasticities
- no possibility of resale
Compare to Perfect Competition, Monopoly
- Charges __ $
- Prod __ outputs (econ. cap.)
- Make economic profits in __ run
- Charges ↑ $
- Prod ↓ outputs (econ. cap.)
- Make economic profits in Long & Short runs
What is
1. Consumer Surplus
2. Producer Surplus
3. Economic Surplus
-
Consumer Surplus
Cx benefitted by
Pay < highest willing -
Producer Surplus
Producer benefitted by
Sell > lowest willing -
Economic Surplus
Cx Surp + Prod Surp
Total Surplus Lost due to
Market Imperfections
e.g. tax, monopoly, over-/under- prod., $ ctrl
Deadweight Loss
3 reasons of Defense of Monopoly
- Large Economoies of Scale in Prod.
e.g. natural monopoly -
R&D into New Tech
bigger barrier - High Qlty Staff, well paid & benefits
When startup costs too high & market can support only 1 profitable firm
or
A Producer prod. at a lower cost than competing firms
Natural Monopoly
e.g. railroads, utilities
3 Actions that
Gov regulates Monopolist
-
Tax
lump-sum profits tax
& monopoly sales tax -
Price Setting
socially optimum $
& fair-return $ - Nationalization
Lump-Sum Profits Tax
is a fixed cost which
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __
Average (Total) Cost ↑
Total Profit ↓
Output & Price unaffected
Cx pay 0
Monopoly Sales Tax
is per unit sales tax
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __
Marginal Cost MC ↑
Total Profit ↓
While Output ↓ & Price ↑
Cx pay partly
Gov set price for Monopolist to produce the
Best Allocation of prod from Society’s viewpoint
is called ___
where Price = ___
Socially Optimum Price
P = MC =AR
(MC ╳ DD)
⇒ Allocative Efficiency
$ paid for last unit = $ of producing the unit
& match social DD
SOMA
Gov set price for Monopolist to earn
Normal Profits only
is called ___
where Price = ___
Fair-Return Price
P = AC =AR
(AC ╳DD)
⇒ Productive Efficiency
unit produced @ lowest possible cost
FRAP
State acquires Monopoly,
by compulsory uncompensated
or buyout, is called ___
Nationalization
may/may not make profit;
may/may not charge socially optimum $
Why MR always < Price $
for Monopolist?
- Monopolist ctrl either $ or Qty
- DD curve is downward sloping
⇒ ↓ $ to sell more ⇒ ↓ Revenue - Selling additional unit earns
less revenue than the previous unit
⇒ MR < $
