Final - Monopoly Flashcards
Monopoly
Market where a single firm produces a good or service with no close substitutes
–> has market power, sets prices
Some producers, both no and yes differentiated products?
Oligopoly
Many producers, no diferentiated products?
Perfect competition
Many producers, diferentiated products?
Monopolistic competition
Reasons for monopolies (2)
- Firm producers goods/services with no close substitutes
- A barrier prevents other firms from joining the market
Barriers to entry (5)
- Control of scarce resources or goods
- Increasing returns to scale
- Technological superiority
- Network Externalities
- Government imposed barriers
Examples of gov imposed barriers
- Patents
- copyrights
what does increasing returns to scale mean?
- Firms with larger volumes have advantages since they get to spread out their fixed costs
- so its easier for them than for smaller firms
What does natural monopolies mean?
monopolies with increasing returns to scale
2 ways of price-setting for firms
- Sell each unit at the same price (single-price monopoly)
- Sells different units of its output for different prices w/o those differences being due to different costs (price discrimination)
What does a monopoly look like, graphically?
Like a single demand curve bc theres only one supplier help
Can monopolies set both price and quantity?
Naur
they set one and the market decides the other
Marginal revenue Equation
change in total revenue
over
change in quantity ourput
2 possible effects when lowering price
- Total revenue goes up bc demand increases (quantity effect)
- Total revenue goes down bc price went down (price effect)
What is stronger at low levels of output?
quantity effect
What is stronger at high levels of output?
price effect
MR and Demand curves
- Same y-axis
- If D is linear so is MR
- the slope of MR is twice that of D
- MR is less than price when Q>0
What does it mean, graphically, if MR > 0
- Total revenue goes up
- elastic
What does it mean, graphically, if MR < 0
- total revenue goes down
- inelastic
How do monopolies maximize their profit?
MC=MR bb
What does adding the ATC to the profit-maximizing graph do?
It helps us calculate profit
Profit equation
Q(P-ATC)
What needs to happen for profit to be positive?
P must be greater than ATC
What are the consequences of monopolies?
- higher prices
- lower quantities
- more PS
- less CS
- more DWL
2 Policy remedies to monopolies
- Public ownership (nationalize them)
- Regulations (kinda like price ceilings)
Why do regulations work
- As long as price is above MC, companies will still have incentive to work
Types of regulations
- Average cost pricing
= Regulations set where ATC = P/demand - Marginal cost pricing
= Regulation set where MC = P/demand
*might require government subsidies
Why are regulations not always efficient?
- Inadequate information
(firms won’t tell the government how much their processes actually cost so firms have to guess) - Regulatory capture
(firms bribe regulators to lie, corrupcion)
what does TR - VC equal?
Produccer surplus
