Final exam - Lecture 1 Notes Flashcards
What are the 3 Assumptions of Monopolies?
1. One seller (one firm) • Only one business 2. No close substitutes • No other goods that ar the same. 3. Total barrier to entry • Keep competition from coming
Monopoly
faces entire D curveq
Why must a monopoly lower it’s price?
◦Must lower price to increase quantity - must lower price on ALL units, not just on last one (or
not?)
‣ Even if there is a monopoly like nv energy if the cost is too high no one would buy it and
buy solar panels
Example
◦Sell 5 sofas a day for $1,000 each
◦Want to sell 6 a day, Lower price to $900
◦Revenue = 5 x $1,000 = $5,000
◦New Revenue = 6 x $900 = $5,400
◦Marginal Revenue = $400 from a $900 sofa!
Marginal Revenue falls twice as faster than
Demand curve
Profit maximization formula
MC = MR
Marginal Cost = Marginal Revenue
Why do monopolies restrict the output?
to raise it’s price
Why is monopoly bad ?
Price increases because there no competition.
Rent
◦A payment in excess of opportunity cost is called a a”rent”
◦Monopolies engage in
“Rent Seeking Behavior” Monopolies restrict output so they can price it more
• Consumer Surplus
The difference between what you actually paid for something and the highest amount you
would have paid. It’s the consumer’s gain from trade
• Perfect competition Consumer’s Surplus
= A
Monopoly Consumer’s Surplus
= C
Monopoly Producer takes what?
Producer takes B
Deadweight Loss =
Deadweight Loss = A
___ is how much the monopoly makes
B
A
is people who would buy the product if there was competition but they dont buy it since they
price out of the market.
= Deadweight Loss
Consumers lose
c and b
___ just disappears since they dont buy it since the monopoly priced it too high.
A
since it’s deadweight loss
If there was competition the consumers would get
a, b, and c.
◦Deadweight
Deadweight loss is a loss to society because some consumers are priced out of the market.
Monopoly lowers the well being of society
Why are monopolies bad?
Deadweight loss and not efficient.
Why is no reason to be efficient and produce at the lowest cost in a monopoly?
because there is no incentive to be efficient and produce at the lowest cost since they control the prices.
Above is what?
Single Price Monopoly.
single price monopoly
charges the same price to everyone.
What are good examples of single price monopolies?
Oil, electricity, natural gas, etc.
Discriminating monopoly
Price discrimination = charging different prices to different customers
What businesses that can price discriminate?
◦Any business not in perfect competition can do it (monopoly does it best)
First degree of price discrimination
different prices to each customer
Second degree of price discrimination
different prices for different quantities
Third degree price discrimination
different prices in different markets/market segments.
What are the 2 requirements of price discrimination
- must be able to identify customers/groups
2. No arbitrage
◦NOT Efficient:
Since P controlled, costs not that important
◦NOT Efficient:
Monopoly gets more than it puts in, some people get less
◦NOT Optimal:
Can improve society’s welfare hurting only the monopoly = Eliminating
Monopoly is
Pareto Optimal.
• The government sets the price for monopolies they set it
cost + %
What do companies do when the government sets there price
they increase the cost since it’s cost + %
