Chapter 11 (Week 6) Flashcards
Monopoly’s marginal revenue curve lies
Below its demand curve at any positive quantity because its demand is downward sloping
Marginal revenue
Change in its revenue from selling one more unit
Marginal revenue curve and demand
The marginal revenue has twice the slope of the demand curve, so it hits the horizontal axis at half the quantity as the demand curve
Deriving the marginal revenue curve formula
MR = p + (Change in P) / (Change in Q) times Q
Choosing price or quantity
A monopoly faces a tradeoff between a higher price and a lower quantity, or a lower price and a higher quantity
The monopoly choose the point on the demand curve that maximises its profit
If the monopoly sets price - demand curve determines output
If the monopoly determines output - demand curve sets price
Shut down monopoly in the short run
Price is below AVC
Shut down monopoly in the long run
Price is below AC
Monopoly has _____ ______
Market power: the ability of a firm to charge a price above MC and earn a profit
- The less elastic –> the higher price you can charge
Lerner index
Ratio of the difference between price and marginal cost to the price:
(P - MC) / P = - 1 / e
- ranges from 0 to 1 for a profit maximising firm
- measure is 0 for a competitive firm because it can’t raise its price above marginal cost
- greater the difference between price and marginal cost, the larger the lerner index and the greater the monopoly’s ability to set price above MC
The demand curve a firm faces becomes more elastic as
Better substitutes for the firm’s product are introduced
More firms enter the market selling the same good
Firms that provide the same product locate closer to the firm
Cost advantages
Superior technology
Better way of organising production
Firm controls an essential facility - a scarce resource that a rival needs to use to survive
Natural monopoly
One firm can produce the total output of the market at lower cost than several firms could
Government creation of a monopoly
Barriers to entry: give monopoly rights, sell monopolies to private firms…
Patents: an exclusive right granted to the inventor to sell a new and useful product, process, substance or design for a fixed period
Optimal price regulation
Eliminate the deadweight loss of monopoly by imposing a price cap equal to the price that would prevail in a competitive market
Problems in regulating
Due to limited information about demand and MC curves, governments may set a price ceiling above or below the competitive level
Regulation may be ineffective when regulators are captured - influenced by the firms they regulate
increasing competition
By allowing more firms to enter the market, the market power of a monopoly decreases
As new firms enter the market, the former monopoly must lower its price to compete, so welfare rises
End a ban on imports so that a domestic monopoly faces competition from foreign firms
If the foreign firms have the same costs as the domestic firm, the former monopoly becomes just one of many competitive firms
As the market becomes competitive, consumers pay the competitive price and the deadweight loss of the monopoly is eliminated
Network
interconnected group of people or things
Good network externalities
If one person’s demand depends on the consumption of a good by others
The value of the good to a consumer grows as the number of units sold increases
Network externalities depend on
Network’s size because customers want to interact with each other
Bandwagon effect
Consumers sometimes want a good because “everyone else has it”
A person places greater value on a good as more and more people possess it
Snob effect
A person places greater value on a good as fewer and fewer other people possess it
Two sided markets
An economic platform that has two or more user groups that provide each other with network externalities
