Chapter 14: Monopoly Flashcards
Monopoly definition
a firm that is the only producer of a good or service with no close substitutes
Monopoly Characteristics
there are barriers that prevent firms other than the monopolist from entering the market
Difference between perfect competition and monopoly characteristics
Monopoly has barriers to entry while perfect competition has free entry and exit
The 4 barriers to entry
scarce resources, economies of scale, government intervention, aggressive tactics
Why do monopolies exist?
No competition resulting from barriers to entry
difference between perfectly competitive and monopoly demand curve
perfectly competitive: any price that is higher than the market price results in zero quantity demanded, an individual producer can sell any quantity at the market price
Monopoly: a monopolist can charge any price but the price affects quantity demanded
marginal revenue
change in total revenue
Explain why the marginal revenue is equal to the price in pure competition but not in monopoly
perfect competition: market price does not change so MR=Price
Monopoly: price and quantity effect decreases revenue so MR<Price
price effect
decrease in total revenue because increase in quantity requires a lower price
quantity effect
increase in total revenue due to the money brought in by the sale of additional units
profit maximization
MR=MC on demand curve
profit
(P-ATC) x Q
pricing strategies
perfect price discrimination and imperfect price discrimination
Explain why a firm has an incentive to use price discrimination when possible
allows the firm to generate the most revenue possible
Give examples of how new technology has lessened monopoly power
more people are able to make what was once a monopoly’s unique product
