Chapter 10 MIDTERM 2 Flashcards
What is the difference between a perfectly competitive demand curve and a monopolistic demand curve?
monopolistic demand curve is negatively sloped;
sales can only increase if price is reduced and vice versa
Where is a monopolists marginal revenue curve situated?
Why?
How is this different from a perfectly competative market?
MR curve is below the demand curve;
bc mono marginal revenue is less than price at which it sells its output.
MR < p
in a PFM:
MR = price at which unit is sold bc they are price takers
what are the 2 rules of monopolistic short run profit maximization (same as chapter 7 rules but downward sloping demand curve )
1) firm should only produce if price (average revenue) > AVC
2) if firm does produce, it should produce at a level of output so that MR = MC
Nothing guarantees that a monopolist will make positive profits in the short run, but if it suffers persistent losses ______
it will eventually go out of business
What maximizes profit in a monopolistic firm
MR < p
which kind of firm does not have a supply curve?
Why?
- monopolistic
-because they are not price takers, they choose their own profit maximization price:quantity combination based on the market demand curve
Are monopolistic markets less or more efficient than perfectly competative markets? Why?
Less bc the restricitions of a monopoly reduces the economic surplus potentially generated within the market.
when are entry barriers used
Monopolies use entry barriers to prevent competition from leaking into the market: some natural and some created
3 types of natural entry barriers
1) NATURAL MONOPOLY no demand conditions would allow for another firm to be successful in the market
2) LIMITED ACCESS TO NATURAL RESOURCES: ie diamond mines, oil deposits , requires luck and insane market power
3) NETWORK EFFECTS
company requires a large amount of users to be successful and thats why first movers of such or those with significant improvements hold all the market power and few can match them : microsoft word, youtube, etc
what is a created entry barrier (examples)
federal regulations, patents, etc
how do you beat a monopoly ?
create an low MES product/service that beats out he industry
ex: facetime is better than cell phones is better than home phones
what is a cartel?
an organizaion of producers who agree to act as a single seller in order to maximize joing profits
ex: maple syrup produced in quebec, all producers collab together
What kind of firms have a downward sloping demand curve?
Cartels and monopolies
how does cartelization of a competitive industry lead to more profits ?
proits can be increased by REDUCING outputs and RAISING prices from the perfectly competative levels
What are the issues that cartels can face? (2)
1) firms within the cartel that cheat (produce too much output and sell it at the high monopoly prices)
2) the entry of new firms that refuse to join the cartel (competition)
Cartels tend to be unstable because of the incentives for individual firms to violate the output restrictions needed to sustain the joint-profit-maximizing (monopoly) price.
yup
Cooperation leads to the ______ _____, but individual self-interest can lead to production in excess of the ______ ______
a) monopoly price,
b) monopoly output.
What is PRICE DISCRIMINATION?
the sale by one firm of different units of a product at two or more different prices (unrelated to its cost)
Ex) senior/student discounts on certain goods/services because they assume they value the product at less and its better to sell some at a reduced price then none at all yk.
when is PRICE DISCRIMINATION POSSIBLE? WHAT ARE THE 3 CONDITIONS?
1) MARKET POWER
price takers cannot price discriminate, monopolies and cartels only
2)DIFFERENT VALUATIONS OF THE PRODUCT
willingness of consumers to pay; segmentation of the market
3) PREVENT ARBITRAGE(reselling)
price discrimination is done to prevent this.
what are the two types of price discrimination? what do they entail
1) PD AMONG UNITS OF OUTPUT
adjusting based on rates consumers are willing to pay (profit maximizes) or even loyalty cards (8th coffee free)
2) PD AMONG MARKET SEGMENTS
charging a higher price in the market segment with the LESSER ELASTIC DEMAND (lack of subsititutes) -senior discounts
Price discrimination is easier for _____ than for tangible goods because for most services the firms transact directly with the final customer and thus can more easily prevent ______.
1) services
2) arbitrage
What is hurdle pricing
setting the initial price higher then offering discounts later on
ex: iphone 15 those dumb mfs man
Consequences of price discrimination?
price discrimination by a firm will provide higher profits than the profit maximizing single price at any level of output (IN MONOPOLIES AND CARTELS)
when should a firm implement PRICE DISCRIMINATION?
what is the gain?
when they are a cartel or a monopoly looking to maximize profits
PD generates higher profits at a level of output than a single price monopolist.
The gain is total economic surplus will increase.
