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BSNS113 > Lecture 23: Theory of the firm and Monopoly > Flashcards

Lecture 23: Theory of the firm and Monopoly Flashcards

1
Q

For perfectly competitive firms, we will see that AR =

A

AR = MR = P

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2
Q

The goal of a competitive firm is to what?

A

maximise profit

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3
Q

At what point is profit maximised in a perfectly competitive firm?

A

MR = MC

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4
Q

If firms in a perfectly competitive market are price takers, how do they determine how much they sell?

A

They sell at the market price and pick the quantity that will maximise their profit

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5
Q

The quantity to maximise profit for a firm in a perfectly competitive market will be where?

A

where MR = MC

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6
Q

How can we calculate economic profit on a perfectly competitive market curve?

A

π = Q (AR - ATC)

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7
Q

On the curve for a perfectly competitive market, where is there zero economic profit?

A

Where P = MR = AR

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8
Q

On the curve for a perfectly competitive market, where are firms making negative economic profit?

A

When AR < ATC

because the cost of making the product is below the price it is being sold for

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9
Q

In the short run supply curve, the MC curve shows how much the supplier will produce and sell at each price. Therefore, the MC curve appears to be the what?

A

supply curve

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10
Q

What is the short run shut-down rule?

A

a firm will operate only if the average revenue is greater than or equal to the average variable cost

ie P>AVC otherwise the firm will shut down

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11
Q

When P < ATC, we have ___________ economic profits

A

negative

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12
Q

When will a firm shut down in a perfectly competitive market?

A

If P < AVC

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13
Q

In the long run, firms will enter or exit the market until profit is driven to ___________ and price equals the minimum ___________ _________ ___________ (___________ scale)

A

zero
average total cost
efficient

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14
Q

The study of the long run depends on how entry of new firms affects the price of inputs. They may

A
  1. be unaffected by entry
  2. increase due to entry
  3. decrease due to entry
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15
Q

What happens in the long run if there is economic profit in the market?

A

Firms will enter in the long run, enticed by the profit. However this changes the industry and the profit eventually disappears

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16
Q

Why is the long-run supply curve up-ward sloping?

A

because previously some resources used in production may be available only in limited quantities and firms have different costs

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17
Q

Define marginal firm

A

the firm that would exit the market if the price were any lower

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18
Q

What happens if the price decreases instead of increased (eg a decrease in demand)?

A

firms would leave the industry until there was zero economic profit

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19
Q

A monopoly firm is a price __________-

A

maker

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20
Q

When is a firm considered a monopoly?

A
  • if it is the sole seller of its product

- its product does not have close substitutes

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21
Q

What are the three cases that cause a monopoly?

A
  1. when a firm owns a key resource
  2. when a firm has exclusive production rights from the government
  3. when a firm has production costs much lower than many smaller producers
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22
Q

What is a natural monopoly?

A

An industry where a single firm can supply a good or service to an entire market at a smaller cost than two or more firms could

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23
Q

What can governments do to create monopolies?

A
  • by giving a single firm the exclusive rights to sell a particular good in certain markets
  • by giving a single firm patent and copyright laws (to serve the public interest)
24
Q

When does a natural monopoly arise?

A

When there are economies of scale over the relevant range of output

25
Q

What sort of demand curve does a natural monopoly face?

A

a downward sloping demand curve

26
Q

What subcategories does a monopoly fit under in the market structure?

A

When there is only one curve

27
Q

Compare a monopoly and a perfectly competitive market:

  • number of producers
  • demand curve
  • price maker or taker
  • how much does it sell
A
  • in a monopoly, there is only one producer, a competitive firm there are lots of producers
  • a monopoly faces a downward-sloping demand curve whereas a competitive firm faces a horizontal demand curve
  • a monopoly is a price maker and a competitive firm is a price taker
  • a monopoly reduces the price to increase sales whereas a competitive firm sells as much or as little at the same price
28
Q

Where does the MR curve fall in a monpoly?

A

The MR is twice as steep as the AR and so it falls underneath it.

29
Q

In a monopoly, if a price fall sells one more unit, the revenue received from previously sold units also

A

decreases

30
Q

A monopoly increasing its sales has two effects of TR. What are these?

A
  • the output effect: more output is sold, so TR is higher

- the price effect: price falls so total revenue is lower

31
Q

A monopoly maximises profit by producing the quantity at which

A

marginal revenue equals marginal cost

32
Q

How is price determined in a monopoly?

A

the quantity to produce the profit is given where MC = MR and the corresponding price on the demand curve is the price charged to maximise profit

33
Q

How is profit calculated on a monopoly curve?

A

(P - ATC) x q

34
Q

The monopolist will receive economic profits as long as price is greater than what?

A

average total cost

35
Q

When would a monopolist be making a loss?

A

when their average total costs rise so that they are higher than the price

36
Q

In a monopoly, where is the efficient quantity?

A

where the demand crosses the marginal cost curve

37
Q

What does demand represent on a monopoly curve?

A

the value to buyers

38
Q

In a monopoly, what happens at the quantities that are to the left of the efficient quantity equilibrium?

A

The cost to the monopolist is less than the value to buyers which is a good thing for the monopolist

39
Q

In a monopoly, what happens at the quantities that are to the right of the efficient quantity equilibrium?

A

the cost to the monopolist is greater than the value to the buyers

40
Q

The market allocates goods to people who ________ it the ________ and to producers who __________ it the ____________

A

value
most
produce
cheapest

41
Q

In contrast to a competitive firm, a monopoly charges a price above the

A

marginal cost

42
Q

From the standpoint of consumers, this high price makes monopoly

A

undesirable

43
Q

From the standpoint of the owners of the firm, the high price makes the monopoly very

A

desirable

44
Q

Is there a deadweight loss in a competitive market? Why?

A

no because in a competitive market, total surplus is maximised

45
Q

Is there a DWL in a monopoly? Why?

A

yes

at q, P>MC so there is economic inefficiency

46
Q

How can this deadweight loss be eliminated in a monopoly?

A

by charging more than one price (price discrimination)

47
Q

Define price descrtimination

A

charging different prices on differences in consumer willingness to pay, not on differences in costs

48
Q

How would producers price discriminate?

A
  • charge those who value higher the higher prices

- charge those who have a smaller MV a lower price

49
Q

What are three conditions for price discrimination?

A
  1. the supplier must have some market power (it must be a price maker not a price taker)
  2. the firm must be able to distinguish consumers according to their willingness to pay
  3. there must be no arbitrage possibilities (a customer can’t buy at a low price and sell at a higher price)
50
Q

Why does price discrimination eliminate DWL?

A

because if every consumer is paying their willingness to pay, total CS = 0 so everything is PS

51
Q

What are the three types of price discrimination?

A
  • first degree
  • second degree
  • third degree
52
Q

Where does price discrimination not go past?

A

MC

53
Q

What is first degree price discrimination?

A
  • the monopolist must charge the most anyone is willing to pay for each unit of output (ie. charge everyone their willingness to pay)
  • this is perfect price discrimination
54
Q

What is second degree price discrimination?

A
  • within consumer price discrimination some people buy multiple units of a god per time period and their MV falls as Q increases
  • price discriminating strategy: charge a high price for the first unit, reduce price on additional purchases (eg. buy one get half price)
55
Q

What is third degree price discriminaton?

A

Where consumers are broken into groups based on their responsiveness to price eg. a price unresponsive group and a price responsive group
eg. student discounts in a movie theatre
There are several groups with different demand curves (and different revenue curves)

BSNS113 (14 decks)

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