Monopolistic Markets Flashcards
what is a monopoly market?
A monopoly market is a market where there is one firm, there are high barriers to entry and one unique type of product. The firm will always set the price on the demand curve where the MR = MC to maximise profits
What is a perfectly competitve market? Are firms Price-takers?
A market where there are a large number of firms, no barriers to entry, and all the firms produce an identical product. Firms act as price-takers which means that the market value of the good and therefore the price the firms take is independent of each firm’s output decision. Price = MC under perfect competition
What is the Consumer surplus in a perfect market? Why do firms make no profit?
Consumer surplus is maximised in a perfectly competitive market because the firms make 0 profit and since the supply curve is flat there is no producer surplus. Firms make no profit in this market because there are no barriers to entry and therefore firms will continue to enter the market untill there is no more profit.
what is the Monopoly’s Profit function?
profit = p x D(p) - c x D(p) and quantity = D(p) where demand is a function of price.
What is the equation for price elasticity of demand in terms of mark up price?
p/(p-c) = e
what is the price elasticity of demand? how does it translate to the demand curve on a graph?
The price elasticity of demand = e and is negative, it relates to the gradient of the demand curve and when PED is high that means that quantity demanded by consumers in the market is more sensitive to changes in the price - small change in price = large change in quantity demanded. For high PED, the demand curve is flatter. When PED is low that means the quantity demanded by consumers in the market changes by a smaller amount relative to the change in price - the demand curve is steeper. Monopolies will prefer to not operate in markets where the PED is higher.
What happens to the welfare in a monopolistic market? what is a deadweight loss and is there one in this scenario?
Consumer surplus is decreased and Producer surplus increases compared to a perfectly competitive market. A deadweight loss is when there is a loss in social benefit in the market and since the price set by the monopoly is higher than the market equilibrium price and the firm is producing a lower number of goods for a higher price there will be a deadweight loss defined by the demand curve, the equilibrium price level, and quantity produced at the monopoly price.
What is the MR? How do you derive it?
MR is the additional amount of revenue gained by the firm for every additional unit of the good sold. it lies below the demand curve. MR is the Total Revenue (TR = pq - cq) equation differentiated with respect to quantity, q.
What is monopolistic competition in a market? what is the zero profits condition in terms of price and MC?
has elements of competition and monopoly: firms are producing differentiated goods in the same market and there are no barriers to entry. The demand curve depends on the decisions of other firms in the market and the degree to which these differentiated products can be substituted for one another. The zero profits condition is met by p > MC instead of MC because different firms producing different products will have different costs of production.
what is the Marginal Cost curve
The MC is the additional cost of producing one more good
How is profit defined on a graph in a monopolisitc competition? why will there be zero profits in the long-run?
Profit is defined by the point where the Average Total Cost (average total cost per unit between the firms in the market) curve intersects with the Quantity supplied by the monopolistic firm and the price set by the firm. in the long-run, however, more firms enter the market and the demand curve becomes flatter because consumers have more goods to substitute for. PED goes up and eventually as more and more firms continue to enter the market the price the firms sell at becomes = to the average total cost curve = Demand curve, called the break-even point.
What is the Average Total Cost Curve?
The ATC represents the total average cost per unit at different levels of production.
