Module 13.4: Monopoly and Concentration Flashcards
What type of demand curve does a monopoly face?
downward sloping demand curve
What does profit maximization involve for a monopoly?
trade-off between price and quantity sold if firm sells at the same price to all buyers.
they will expand output until marginal revenue equals marginal costs.
What are the two pricing strategies for a monopoly?
single - price and price discrimination.
price discrimination - when people cannot resell the product, best way to maximize profits is to charge different people different prices.
can long run profits exist in a monopoly?
yes, they do not attrract new market entrants due to high barriers of entry.
Do monopolists charge the highest possible price?
No, because monopolists want to maximize profits, not price.
What is the formula for marginal revenue when a firm sells all units for the same price?
MR = P * ( 1 - 1 / Ep)
P = current price Ep = absolute value of price elasticity of demand at price = p
What must a monopolist in the short run do to ensure a profit?
demand curve must lie above the firm’s average total cost curve at the optimal quantity so that price > ATC.
What is the formual for economic profit in the short run?
( P - ATC ) * Q
What is price discrimination? What must the seller do for price discrimination to work?
the practice of charging different consumers different prices for the same product or service.
1) Face a downward-sloping demand curve
2) have at least two identifiable groups
3) be able to prevent the customers paying the lower price from reselling
What is deadweight loss? would there be any deadweight loss in perfect price discrimination>
the quantity produced by a monopolist reduces the sum of consumer and producer surplus.
No deadweight loss in perfect price discrimination.
How does the price differ between perfect competition and monopolistic competition?
compared to perfect comp, the monopoly firm will produce less total output at a higher price.
What is a natural monopoly?
When the average cost of production for a single firm is falling throughout the relevant rate of consumer demand.
What is average cost pricing?
the most common form of gov regulation for monopolies. It forces firms to reduce price to where the firm’s ATC intersects the market demand curve.
What is marginal cost pricing?
a form of gov regulation that forces monopolists to reduce price to the point where the firms MC curve intersects the market demand curve. Such a solution requires a gov subsidy, because the firm will be operating at a loss.
Describe the short-run supply function for all forms of competition?
perfect competition - the marginal cost curve above its average varaible cost. the sum of the quantities supplies at each price across all firms in the market.
All other forms of competition - no well-defined supply function.
