Econ Chapter 9 Flashcards
Competition
A market with only one seller of a product that has no close substitute and there are natural and legal barriers to entry that prevent competition
Where do we see Pure Monopolies?
Normally pretty rare
Present in Government programs
What is a natural monopoly
When a firm that can produce at a lower cost than a number of smaller firms could
What are the three sources of Monopoly Power?
1) Legal Barriers
2) Economies of Scale
3) Control over an Important Input
What does the demand curve of a monopolist and a perfectly competitive firm look like
Monopolist: Downward sloping curve
Perfectly Competitive: Perfectly Elastic, horizontal line
Where on the linear demand curve is unit elastic, elastic, inelastic
Elastic Above midpoint, Unit elastic at midpoint, Inelastic below midpoint
Three steps for determining the profit maximizing output for monopolists
1) Find Q* where MC=MR
2) Find P* by following Q* up the to the demand curve, then you can find total revenue
3) Find total costs, go straight up from Q* to ATC curve and then left to find ATC per unit. Find TC by TC = ATC x Q
Monopolists in the long run
Can make a profit because no other firms can enter the industry
How can a monopolist have a loss?
Because consumers don’t demand the product
What is a patent
When the government puts its police powers behind the patent holders exclusive rights to make a product for a period of time
- Allows a product to be sold at a higher price
What are some objections to monopolies?
1) They are not fair
2) They lead to lower output and higher prices
Welfare Loss in Monopoly
Monopolists produce at an output where price is greater then marginal costs
- Leads to not enough production which leads to deadweight, or welfare loss
Anti Combine Laws
- Laws designed to prevent monopoly, promote competition, and enhance economic efficiency
Competition Bureau
Looks at complaints including price fixing, bid-rigging, and predatory pricing, and often prevents competition reducing activities
2 Ways to deal with monopolies
1) Anti Combine Laws
2) Government Regulation
Marginal Cost Pricing
Decision to set price where the price of a good equals marginal costs
What happens when a monopolist is forced to sell at a non profitable price
Governments subsidize them
Average Cost Pricing
Production where the price of a good equals the average total cost
3 Difficulties in Average Cost Pricing
1) Accurate Calculation of Costs
2) No Incentive to Keep Costs Down
3) Special Interest Groups
Price Discrimination
The practice of charging different consumers different prices for the same good or serve when the cost of providing that good or service is not different for different consumers
3 Conditions for Price Discrimination to exist
1) Monopoly Power
2) Market Segregation
3) No Resale
Quantity Discounts
When firms charge less when people buy in bulk
