Chapter 11 Flashcards
monopoly profit maximization, market power and welfare, taxes and monopoly, monopsony
What is a monopoly
When there is only one supplier of a good which their is no close substitute
What power does a monopoly give the firm that owns it
it gives the firm the ability to control the market price given the market demand
How do monopolies maximize profit?
having marginal cost equals marginal revenue
What happens to marginal revenue (MR) when demand is perfectly elastic?
MR = price (p)
What happens to MR when demand is elastic?
MR > 0
What happens to MR when demand is inelastic?
MR < 0
What happens to MR when demand is unitary elastic?
MR = 0
What determines the ratio of price to marginal cost for a moonopoly?
the elasticity of demand, the more elastic the demand, the less a firm can raise prices without losing sales
What 3 things cause demand to be more elastic?
- Better substitutes
- More firms
- Firms are closer geographically
What effect does a monopoly have on surplus and dead weight loss (DWL) ?
consumer surplus decreases, production surplus increases and it creates DWL
What can a government do to help reduce deadweight loss caused by monopolies? (2 things)
- Optimal price regulation - prices cannot be higher than competitive prices
- non-optimal price regulations - any other price ceiling than the optimal level
What is the big difference between optimal and non-optimal price regulations?
Optimal price regulations have no deadweight loss, where as non-optimal have a some deadweight loss, but less than if the monopoly was left free
What is a monopsony?
A single buyer in a market
What does a monopsony allow consumers to do?
A monopsony allows consumers to set prices at a lower level than in a competitive market
A monopsony in labour will higher workers up to what point?
when marginal expenditure = marginal value
What is expected of a monopsony with respect to labour, what does this cause (think surplus)?
A monopsony is expected to have lower wages and higher less workers than a competitive market creating dead weight loss
What effect does a minimum wage have on a monoposony?
With a minimum wage, firms are will higher more workers heading towards the optimal number the closer the minimum wage is to the competitive level
