CHAPTER 12: Monopoly Flashcards
What is a monopoly?
market w/ a single firm that produces a good or service w/ no close substitutes & protected by a barrier that prevents other firms from entering that market
How does technology weaken or strengthen a monopoly?
○ Technological change can create substitutes & weaken monopoly
E.g. UPS & email are subs for Canada Post
○ Arrival of new tech can create a monopoly
E.g. Introduction of Google
What are barriers to entry? Explain the 3 types.
constraint that protects a firm from potential competitors
~ Natural Monopoly - market in which economies of scale enable one firm to supply the entire market at the lowest possible cost
~Ownership Barrier - monopoly in which competition & entry are restricted by a ownership
~ Legal Monopoly - market in which competition & entry are restricted by the granting of a public franchise, government licence, patent, or copyright
What is the key difference between a monopoly & competition?
monopoly sets its own price
Causes a market constrain - to sell at a larger quantity, monopoly must set a lower price
What are the 2 types of price situations in a monopoly?
○ Single-Price Monopoly - firm that must sell each unit of its output for the same price to all customers
○ Price Discrimination - firm that sells different units of a good for a different price
E.g. Microsoft sells Windows & Office at different prices to different buyers (teachers, government, students, etc.)
Total Revenue Equals …..
Price (P) x Quantity Sold (Q)
In a monopoly, the marginal revenue curve lies ____ the demand curve.
MR curve lies below the demand curve (downwards sloping)
A monopoly always produces in what range of elasticity of demand? Describe the 3 elasticities of demand.
demand is always elastic
○ Elastic Demand - elasticity is greater than 1; change in quantity demanded due to a change in price is large
§ Occurs if a 1% fall in the price brings a greater than 1% increase in quantity demanded
§ Fall in price increases TR & MR is positive
○ Inelastic Demand - elasticity is less than 1; change in quantity demanded due to a change in price is small
§ Occurs if a 1% fall in price brings a less than 1% increase in quantity demanded
§ Fall in price decreases TR & MR is negative
○ Unit Elastic Demand - elasticity = 1; any change in the price of a good leads to an equally proportional change in quantity demanded
§ Occurs if a 1% fall in the price brings a 1% increase in the quantity demanded
§ TR does not change; MR = 0
Monopolies are not price-taking firms. Instead, a monopoly is a _____.
Price-Setting Firm
Produce at output levels that maximize economic profit (point at which MR intersects MC)
If MR exceeds MC in a monopoly, how is profit increased?
profit increases if output increases
When MC exceeds MR in a monopoly, profit is increased if……
profit increases if output decreases
Why doesn’t a monopoly set the price of a good at the maximum possible price?
At max. possible price, the firm would only be able to sell one unit of output (less than profit-maximizing quantity)
will result in a low quantity sold, and will not bring in much revenue
T/F: Demand changes in a monopoly
F: Demand stays the same - consumers don’t change when an industry is taken over by a single firm
Monopoly recognizes the constraint on price at which it can sell it output
Why is a monopoly inefficient?
Price is greater then MC (quantity supplied)
Smaller output & higher price creates deadweight loss
Consumer surplus shrinks - pay more for a good & get less of the good
Marginal social benefit exceeds marginal social cost
What is rent-seeking?
opportunity to capture monopoly rents provides firms with an incentive to use scarce resources to secure the right to become a monopolist
