Monopoly Flashcards
Monopoly
a firm that’s the sole seller of a product without any close substitutes
have greater power than any single firm in a competitive market
examples of government-created policies
patents and copyright laws
Natural monopoly
a type of monopoly that arises b/c a single firm can supply a good or service at a lower cost than two or more firms can
When is a firm in a natural monopoly?
as output increases, average total cost decreases
Demand curve for monopoly firms
downward sloping
the demand curve is the same as the market demand curve
by adjusting the quantity (or price), monopolist can choose any point ON the demand curve
Marginal revenue
the amount of revenue that the firm receives for each additional unit of output
on a graph, marginal revenue is less than the demand
Monopolies’ Marginal Revenue
A monopolists’ marginal revenue is less than the price of the good
Output effect
more output is sold so quantity is higher (increases total revenue)
Price effect
the price falls and is lower, decreases total revenue
What determines the profit-maximizing quantity? (Qmax)
intersection of the marginal revenue curve and the marginal cost curve
Relationship between price, marginal revenue (formula)
P > MR = MC
price exceeds marginal cost
equation to find profit
Profit= (P-ATC) x Q
Profit-Maximizing Rules for Monopoly firms
- Derive the MR curve from the demand curve
- Find Q at which MR=MC
- On the demand curve, find P at which consumers will buy Q
- If P>ATC, the monopoly earns a profit
If a monopoly’s fixed cost increases, its price will ___ and its profit will ___
stay the same, decrease
Where does a monopolist produce at?
the monopolist produces less than the socially efficient quantity of output
