Monopoly Flashcards
why do monopolies exist
there are barriers to entry
What are the 3 things that define a monopoly
- Full control over the central resources
- Intellectual property rights
- Existence of economies of scale (ATC)
What factor about monopolies gives rise to natural monopoly and applies to industries with high fixed/initial costs
Existence of economies of scale
For perfectly competitive markets, profits are maximized when MR = MC = P. But for monopolies,
MR < P, profits are maximised when MR = MC still
When we are drawing a monolpoy curve, how do we find the MR
- Get TR = p*Q, then divide by change in quantity to get MR
- MR starts at the same price as TR/monopoly, but the quantity goes to half of the TR/monopoly curve
Can monopoly sustain profits in long run or short run
There is no short run or long run, monopoly can sustain positive profit
What are the consequences to monopolies always having profit
Less is supplied
consumers pay higher prices
What are the government regulations of monopolies
- Antitrust law
- public ownership
- price regulation
describe the antitrust law
We split on company into a bunch of smaller companies. But when we do this ATC gets larger so they aren’t able to produce a high quantity at a low price. This one does not work for regulation of natural monopoly
describe public ownership
welfare maximization instead of profit maximization
The problem with this is that they aren’t driven for profit…so they’re less driven, like government
describe price regulation
We want to move monopolistic industries as close to perfectly competitive outcome as possible.
However, doing this the companies lose on profit, so the government cant do this directly, they must give the company an incentive to stay in the industry and change less for their products
Gov sets price as min ATC and gives ‘fair rate of return’
what are externalities
when actions of one party have unintended consequences on the third party
Is positive externalities beneficial or harmful
beneficial
describe positive externalities in consumption
we do things for ourselves but have a beneficial repercussion on others
like education, immunization
what are positive externalities in production
gardening and beekeeping
what are negative externalities
when actions of one party harm the third party
what are negative externalities in consumption
smoking
drinking
driving and drinking
what are negative externalities in production
pollution
agriculture - fertilizers and antibiotics
what is MPC
marginal private cost
what is MSC
marginal societal cost
what is the marginal damage
MSC - MPC
what is max utility for private consumption
MPC = MPB
What is max utility for society
MSC = MPB
The difference between the what the society wants and what the private wants is the overconsumption/ overproduction if private markets are _____ __________
left unregulated
