Chapter 15 - Monopoly Flashcards
Monopoly
A firm is a monopoly if they are the sole seller of a good and the good has no close substitutes
The fundamental cause of a monopoly is barriers to entry
Barriers to Entry
Other firms cannot enter the market. Three main sources on how a monopoly is a monopoly
- monopoly resources - a key resource used in production is owned by a single firm
- government regulation - the government gives the firm a right to produce a specific good or service
- production process - single firm can produce output at a lower cost than can a larger number of firms
Monopoly Resources
When a firm has access to a key resource they can form a monopoly. However, exclusive ownership might create a monopoly it isn’t usually the reason why monopolies arise.
Government Created Monopolies
In many cases government allow monopolies to arise.
Patents and copyright laws allow people to become monopolist of their own work. (ex. copyright laws - book owners, patents - pharmaceutical companies)
these patents also incentivizes further advancements (ex. more pharmaceutical research, or to write better and more books)
Natural Monopoly
When a single firm can supply a good or service for a lower cost than two or more firms could.
So, a natural monopoly is just when it is better, easier and more efficient for one firm to do the work of producing a good rather than two or more firms
This however can change if demand increases and a competitive market is then required due to increases in demand.
Monopoly Versus Competition
A competitive demand curve will be a horizontal line because in a perfectly competitive market firms are price takers for the price that is set by the market forces
Versus, monopolistic firms can choose what they want to charge for their goods or services because they are the only seller, however their slope is till downward because they cant exactly sell for whatever price they want, if price goes up demand goes down no matter if they are a monopolistic firm
Marginal Revenue
The marginal revenue of a firm is always lower than its demand (average revenue)
Unless its at the first unit sold, then it is equal
This is because as the firm increases quantity produced they have to lower the price to keep their buyers buying from them
Marginal revenue is less than the good of the price (besides the first unit sold)
Average Revenue
Total revenue divided by quantity sold
A measurement of how much revenue is made per unit sold
Maximizing Profit
When looking at how a monopolistic firm maximizes profits we look at its marginal revenue and cost.
If the marginal cost is very low but the marginal revenue is high (left of equilibrium), this would in theory be the most profitable option however, because with higher prices there is less demand, the firm wouldn’t be able to sell enough for it to make a good profit
If the marginal revenue is low but marginal cost is high (right of equilibrium) this is simply not efficient for the firm because it is losing more in costs than it is making in profit
finally, the sweet spot with the maximized profit would be the equilibrium where marginal revenue and cost intersect. This is maximized profit because it is essentially the highest a firm can charge without losing too many buyers or losing too much revenue.
Profit for a Monopoly
Profit = (P - ATC) x Q.
Area Calculations:
Height of the box = Price minus Average total Cost
Width of the box is quantity sold
Therefore, the area of this box is a monopoly’s total profit
Profit Maximizing Rules for a Monopoly Firm
- derive the MR curve from the demand curve.
- Find Q at which MR = MC.
- on the demand curve, find P at which consumers will buy Q.
- if P > ATC, the monopoly earns a profit.
Welfare Economics with Monopolies
the socially efficient quantity is found where the demand curve and the marginal-cost curve intersect.
There is a difference between maximizing profit and maximizing total surplus
Deadweight Loss
The deadweight loss is the area of the triangle created when the monopoly price is anywhere vyt the equilibrium
This deadweight loss shows the negative aspects of the monopoly
Marginal revenue goes up if the monopoly price goes up, however this increases deadweight loss
Price Discrimination
When a good is sold to different people for different prices
Not possible in a competitive market
Price discrimination can be used to maximize profits
Price discrimination only works when u can separate customers according to their willingness to buy
Price Discrimination can raise economic welfare, ensuring people get the good at what they value it to be
Arbitrage
Buying a good in one market, for a specific prize and then selling it in another market for a higher price.
