Chapter 10 Flashcards
The difference in individual firm in perfect competition and monopoly
The individual supplier is an atomistic unit with no market power. In contrast, a
monopolist has a great deal of market power, for the simple reason that a monopolist is the sole
supplier of a particular product and so really is the industry
Is there a difference between short run and long run for a monopolist
Furthermore, the distinction between long run and short run is blurred, because a monopoly that
continues to survive as a monopoly obviously sees no entry or exit.
There are three main reasons for the existence and continuance of
monopolies:
Scale economies, national policy and successful prevention of entry
What is a natural monopoly
When LATC is constantly declining-. there is no the least cost of production-> bigger firm will always overrule the smaller ones
Can natural monopoly turn into competitive market?
Yes
Bell Canada was considered to be a natural monopoly in the era of land lines: It
would not make economic sense to run several sets of phone lines to every residence. But that was
before the arrival of cell phones. Canada Post was also thought to be a natural monopoly, until
the advent of FEDEX, UPS and other couriers proved otherwise
What is the downside of the monopoly born from national policy
Industries
that are not subject to competition can become fat and uncompetitive: Managers have insufficient
incentives to curtail costs; unions realize the government is committed to sustain the monopoly
and push for higher wages than under a more competitive structure.
What is the legal form of entry barrier
copyright and patent protection
other ways of maintaining barriers to entry
Predatory pricing (the pricing of goods or services at such a low level that other suppliers cannot compete and are forced to leave the market)
Lobbying government (A lobby is typically formed to influence government officials to act in a way that is beneficial to the lobby’s best interests, either through favorable legislation or by blocking unfavorable measures.)
Excess production capacity (Excess capacity indicates that demand for a product is less than the amount that the business potentially could supply to the market. )
Network goods ( a good (product or service) that has higher value the more customers that use it.)
difference between MR and MC
MR- marginal revenue->change in total revenue obtained by selling one more unit
MC-change in total cost obtained by producing one more unit
Average revenue is
Revenue per unit sold=price
The maximum revenue point occurs where
The price elasticity is unity (-1), at the midpoint of a linear demand curve
MR=0
How to decide what is the optimal output for the monopolist
If MR > MC, increase output
If MR < MC, reduce output
If MR = MC, output is optimal, or where the difference between TR and TC is the greatest
Is total revenue is maximized at the same output capacity and profit?
No
with a
straight-line demand curve total revenue is a maximum at the ____
midpoint of the demand curve.
the MR curve must intersect the quantity axis ___
midway between zero and the horizontal-axis
intercept of the demand curve
Graphically, where the profit is maximized , if you are given Q,MC,MR,AC
intersection of MR=MC
Graphically, what is the profit , if you are given Q,MC,MR,AC
P-AC
Where profit lies for a monopolist in the demand curve
Elastic segment
How does LAC and LMC look in the long run for a monopoly
Horizontal
The key characteristic of constant returns
to scale is
that a doubling of inputs leads to a doubling of output.
What is allocative inefficiency
Allocative inefficiency arises when resources are not appropriately allocated and result
in deadweight losses
What is the measure of superiority of the competitive structure over monopoly
The deadweight loss
Under perfect competition price is equal to
Marginal cost
What is price descrimination
Price discrimination involves charging different prices to different consumers in order
to increase profit
Conditions for price discrimination (third degree price discrimination)
The seller must be able to screen or segregate the market into those willing to pay more and those willing to pay less
Resale must be impossible or impractical
Price discrimination may actually reduce the deadweight loss in the case of monopoly – because more may be sold in total
What is perfect price discrimination
Such discrimination is not so unrealistic:
A monopolist who can sell each unit at a different price maximizes profit
by producing Q∗. With each consumer paying a different price the demand
curve becomes the MR curve. The result is that the monopoly DWL is
eliminated because the efficient output is produced, and the monopolist appropriates
all the consumer surplus. Total revenue for the perfect price discriminator
is OABQ
A tax
accountant may charge different customers a different price for providing the same service; home
renovators may try to charge as much as any client appears willing to pay.
What is second degree price discrimination
It is also possible that, while individuals might have defining
traits which influence their demands, such traits might not be detectable by the supplier. Nonetheless,
it is frequently possible for the supplier to offer different pricing options (corresponding to
different uses of a product) that buyers would choose from, with the result that her profit would be
greater than under a uniform price with no variation in the use of the service. Different cell phone
‘plans’, or different internet plans that users can choose from are examples of this second-degree
discrimination.
What is a cartel
A cartel is a group of suppliers that colludes to operate like a monopolist.
example of cartel
Buying a taxi licence
in competitive market MC equals to
supply
Why cartels tend to be unstable
Cartels can break down as member firms usually have an incentive to expand output (against the agreement), resulting in a lower market price
Cartels within individual economies are almost universally illegal
Why monopoly can be good
This is
because such firms have more profit and therefore more resources with which to fund R&D and
may therefore be more innovative than competitive firms. If this were true then, taking a long-run
dynamic view of the marketplace, monopolies could have lower costs and more advanced products
than competitive firms and thus benefit the consumer.
What is patent law
Patent laws grant inventors a legal monopoly on use for a fixed period of time.
What is rent seeking
Rent seeking is an activity that uses productive resources to redistribute rather than
create output and value.
