Module 6 Market Structure Flashcards
What is the first assumption of perfect competition?
Firms are price takers
What can moral hazard lead to?
Market failure
What condition signifies profit maximization?
MR = MC
When are profits positive?
If P > AC(q*)
What happens when price > AC?
Firm makes a profit
What happens if P > AC(q*)?
Profits are positive
What happens when P < LRAC?
Profits are negative, firm exits
What is a monopoly?
One firm dominates
What is a natural monopoly?
Barriers other than legal
What is the monopolist’s demand curve?
Downward sloping
What is the formula for marginal revenue?
MR = ?R/?Q
What is the optimality condition for a monopolist?
MR = MC
What is the Marginal Cost?
COSTS
What is Social Surplus (SS) under Monopoly?
SS = WTP - costs
What is the second assumption of perfect competition?
Consumers are price takers
What does marginal revenue equal?
Market price
When are profits negative?
If P < AC(q*)
What does q* represent?
Optimal quantity
What happens when P >= LRAC?
Profits are zero or positive
Condition for optimal q=0
P < AC
Why can monopolies set their own prices?
No competition
How is revenue calculated for a monopolist?
REV = Price x Quantity
What is the optimality condition for profit maximization?
P = MC
Under what condition can a firm cover some fixed costs?
P > AVC
For a monopolist, how does marginal revenue compare to market price?
Lower than price
What does perfect information imply?
Full price and quality info
What happens if MR > MC?
Raise output
What is the formula for calculating profits?
PROFIT = REVENUE � COST
What does price = AC indicate?
Firm breaks even
When should a firm shut down?
P < AVC
What are examples of crown corporations that can be monopolies?
Post office, telecoms
What does it mean for firms to be price takers?
Market price unaffected by single firm’s activities
What is adverse selection?
High risk individuals buy insurance. Can make insurance markets fail
What does MR stand for?
Marginal Revenue
Formula for Revenue
R = P q
When are profits zero?
If P = AC(q*)
What does it mean if P = AC(q*)?
Zero profits
What causes strong economies of scale?
Big firms low average costs
When is marginal cost low?
Adding customers is cheap
What are the components of the change in revenue?
Price effect & Output effect
What does PMONO > AC indicate?
Positive profits
What happens if PMONO < AC?
Negative profits
What is the calculation for Social Surplus?
WTP - costs
What is needed to calculate Social Surplus, given Monopoly Price Output?
WTP and costs
What is the acronym for willingness to pay?
WTP
What does DWL represent in monopoly?
Deadweight loss (DWL)
What does it mean for consumers to be price takers?
Market price unaffected by single consumer’s activities
How is Marginal Revenue (MR) calculated?
MR = ?R /?Q
What costs does a firm incur in the short-run?
FC and VC
What must monopolies consider when setting prices?
Consumer preferences
What is an example of control over a scarce physical resource in small towns?
Petro stations
For a perfectly competitive firm, what is ?R/?Q?
Market price (P)
What is the term for the cost associated with Social Surplus?
Costs
What does MC stand for?
Marginal Cost
Give examples of legal monopolies.
Patents, licenses
Why is ?P negative for a monopolist?
Downward demand
What is another term for Demand?
MR
What is the definition of Marginal Cost (MC)?
Change in costs by output change. It is the additional costs incurred by selling one more unit of output.
How does producing more affect MC?
MC rises
How does producing more affect MR?
MR falls
What occurs when price < AC?
Firm makes a loss
Can a firm quickly re-enter after exiting?
No
Examples of natural monopolies?
Telecoms, aircraft, military
