chapter 10: Monopoly Flashcards
Marginal revenue
delta R / delta Q
MR = Change in total revenue obtained by selling on more unit
if total revenue begins to decline, then MR becomes negative
Total revenue
TR = P*Q
where TR is at max, MR (marginal revenue) becomes negative at higher outputs
TR is at max of mid point of demand
if TR becomes to decline, then additional revenue becomes negative
What happens to the marginal revenue if the total revenue stats to decline
then MR becomes negative
Average revenue
price per unit sold
Marginal cost
MC = change in total cost obtained by producing one more unit
Profit
total revenue – total cost = TR - TC
in a graph, profit per unit is AB
total profit is AB * Qe (number of units sold)
total profit = PeABCe
B is the intersect between ATC and Qe
A is intersect between Qe and Pe on the demand curve
Pe is equilibrium price
Ce is equilibrium cost
where does the monopolist maximize profits
at the mid point of demand
profit maximization will always also lie at unit elasticity of the demand curve
where difference between revenue and costs is greatest
where on the graph, TR curve hits peak and vertical difference with TC is biggest
what is the profit maximization rule to find optimal output
we assume demand is strictly a straight line
If MR > MC, increase output
If MR < MC, reduce output
If MR = MC, output is optimal (where difference between revenue and costs is greatest)
Scale of output in a natural monopoly and the costs
How do they evolve
the Average Cost of producing any output declines with the scale of operation (economies of scale)
Increasing returns to scale, even at very high output levels
the ATC curve continue to decline in the long run
ex: Hydro Qc
national policy
a deliberate government policy to protect a domestic monopoly
they can be costly to tax payer
e.g. a “national” carrier in the airline industry
how to maintain barriers to entry
reason for monopolies to survive
Patents, granted by government for research and development
Predatory pricing, intended to drive out potential competition (Illegal)
Lobbying government for subsidies as a means of preventing entry
Excess production capacity
Network goods that are utilized almost universally
- ->
ex: Microsoft operating systems, Winzip
what is the difference between a perfect competition and a monopoly regarding goods produced
Perfect competition: Homogenous products
Monopoly: unique product with close substitute
what is the difference between a perfect competition and a monopoly regarding sellers and buyers
Perfect competition: large number of buyers and sellers
Monopoly: one seller and large number of buyers with downwards sloping demand
what is the difference between a perfect competition and a monopoly regarding price control
Perfect competition: price taker
Monopoly: price maker
what is the difference between a perfect competition and a monopoly regarding profit maximization
perfect competition: Average revenue = P = Marginal Cost
AR = P = MC
Monopoly: MR = MC
what is the difference between a perfect competition and a monopoly regarding entry and exit from firms
Perfect competition: free entry and exit
Monopoly: barriers to entry
what is the difference between a perfect competition and a monopoly regarding decisions taken
Perfect competition: quantity to be produced
Monopoly: either price or quantity to be produced
what is the difference between a perfect competition and a monopoly regarding maximized profit in long run
Perfect competition: normal profits
Monopoly: abnormal profits
what is the difference between a perfect competition and a monopoly regarding technology’s effect
Perfect competition: still zero profit because, usually, price goes down and output goes up
Monopoly: generate higher profits and output is not undermined
are the curves gonna be linear in real life?
nah bpy
they non linear
A monopolist’s choice of plant size in long run
Monopolist is free to choose whatever plant size is best
Profit max rule is always MR = MC, whether long run or short run
LAC = LMC due to constant returns to scale (cost of producing each unit will remain constant)
–> this means doubling of output = doubling of costs
To establish Quality of output we need the MR curve, to generate constant profits, it must lie above LMC curve
In the short run with plant size smaller, it can be beneficial
in long run, must adapt plant size to the change in demand
must consider profits made with different plant sizes
where could there be losses?
when the ATC (average total cost) curve is anywhere above the demand curve
difference between monopoly and perfect competition regarding allocation of ressources
a perfect competition, resources are used up to the point where MC = P
demand curve reflects the true marginal value and if the MC represents true social cost
the profit maximization outcome represents a social optimum
true cost = true benefit
Monopolist will inefficiently allocate resources as long as MC = MR as the profit maximizing output
why is monopoly inefficient in allocating ressources
it is inefficient because output is increased above this quantity, the additional benefits exceeds additional cost of producing it exceeds
additional benefit is measured by willingness of buyers to pay (market demand curve)
additional cost is the long run MC curve under assumption of constant returns to scale
there is deadweight loss in ABF*
monopolist produces less and charges higher prices
allocative inefficiency
when ressources are not properly allocated and result in deadweight loss
What is the ABF in a graph
efficiency loss associated with having monopoly rather than perfect competition
Dead Weight Loss arises because value > MC for units QPC - QM
QPC = perfect market optimum
QM = monopoly optimum
price discrimination
charging different prices of identical products to different consumers in order to increase profit
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
may actually reduce the deadweight loss in the case of monopoly – because more may be sold in total
efficient output with price discrimination
output where every customer demand is met
case of where the producer could charge a different price to each buyer, implying D = MR
what would happen
supplier has more information about buyers, and can segregate them
his profit max choice comes closer to producing the efficient output Q*
Q* is where MC = D = MR
Q* is now the profit maximizing output – it is also the social optimum
cartels acting like monopolist
group of producers who co-operatively reduce output with the aim of increasing profits
It behaves like a monopolist
Cartels within individual economies are almost universally illegal
If MC is the joint supply curve of the cartel, market price is higher and less is produced than under perfect competition
cartel instability
there is an incentive for firms to break the collusive agreement and sell more
at the Quantity output of the monopoly (Qm): the MC is less than the price
profit could be increased for an individual firm if other firms do not also increase output
rent seeking
activity that uses productive resources to redistribute rather than create output and value
Lobbying the government to reduce competition
has a resource cost or time cost
The work of lobbyists does not result in more output
who pays for rent seeking?
It gets incorporated into the cost structure of firms who have a degree of market power
Consumers also pay in the form of higher prices
what will monopolist seeing to maintain monopoly do with his ressources
devotes ressources to restricting competition
it will increase firm’s cost
While it may reduce his profits in the short run, it helps maintain the monopoly status in the long run
invention
the discovery of a new product or process through research
innovation
introduction of a new product or process
Do monopolies have a greater tendency to invent and innovate?
Monopolists say yes, but empirical evidence does not support this claim
patent laws
designed to foster innovation by granting monopoly production rights for a period of 10-15 years
Is MR curve half of the demand curve in a monopoly?
Ye boyyy
