Monopoly Flashcards
Characteristics
- Produce where MR = MC
- Supernormal profits in the long and short run.
- Produce on the elastic part of the demand curve.
- Produce deadweight loss.
- Can set price or output, but not both.
Why do Monopolies produce on the elastic portion of the demand curve?
Where marginal cost = demand (AR), price elasticity of demand is zero. Where the demand curve intersects the X-axis, the price elasticity of demand is -1. Therefore if producers produced anywhere between these two points, then they would have a negative marginal cost, and would have to match this with a negative marginal revenue.
How can we find how much monopolists increase price above the perfectly competitive level?
The monopoly mark-up ratio, or Lerner index, compared to perfect competition, can be found using the formula:
p-mc/p=-1/pED
p-mc/p represents the mark-up ratio. There is an inverse relationship between the ratio and the price elasticity of demand. As price elasticity tends towards -infinity, and the demand curve becomes more elastic, the mark up tends to 0.
We return to perfect competition.
How to find monopoly price and quantity?
Monopoly maximisation problem= Pq(q)- c(q).
This finds the Marginal revenue, then set equal to marginal cost, which will find the quantity.
Substitute quantity into price -inverse demand function.
Why are monopolies Pareto inefficient?
Pareto efficiency occurs when no one can be made better off without someone being made worse off.
In a monopoly, if a producer raises prices or cuts quantity, this makes them better off, at the expense of the consumer. Transfer of consumer to producer surplus.
