Monopoly 2 Flashcards
What type of efficiency does a monopoly have ?
A monopoly is productively and allocatively inefficiency because the price is higher than both points .
X-inefficient because monopolies can get lazy and inefficient and let costs go above AC curve
Sometimes dynamically inefficient as it depends on whether the company spends their supernormal profits on R and D
Why do goverment supports monopolies if they are mostly inefficient ?
This is because of natural monopolies. This is when it is naturally most efficient if only one market is in the market.
What are the two reasons why a monopoly is a natural monopoly ?
One is high sunk costs. It would be inefficient for another company to take on these high sunk costs by entering the market.
Another reason is huge internal economies of scale. For example TFL could use technical economies to invest in specialist technology like oyster card system to replace workers lowering costs. Furthermore, for TFL to reach its MES it needs to increase output and sales massively and would need to be the only seller in the market to be most efficient.
What does the natural monopoly diagram look like ?
You draw the internal economies of scale part of the LRAC curve only up to the MES. You also draw a Long run MC curve which is below the LRAC curve. It follows the same shape but just below.
Then you draw the AR and MR curve and draw above both LRAC and LRMC curve to be more neat
What does the natural monopoly diagram look like ?
You draw the internal economies of scale part of the LRAC curve only up to the MES. You also draw a Long run MC curve which is below the LRAC curve. It follows the same shape but just below.
Then you draw the AR and MR curve and draw above both LRAC and LRMC curve to be more neat
Why would we use a constant marginal cost curves ? if mc is constant what is AC ?
To simplify things economists will use constant marginal cost.
If MC is constant AC is constant as well
Constant MC and AC is just a straight line from any x axis
What is price discrimination ?
This is when a firm charges different groups of consumers different prices for the same good
How can price dsicrimination be used in relation to PED ?
For instance, adult workers would be charged higher prices as they are inelastic consumers. However students would be charged lower prices as they are elastic consumers
(1) What are the 3 conditions for price discrimination ?
(1) market power - if a firm has enough market share they can change the price of its good without losing all consumers. Without the ability to change the price on it sgood it cannot price discrimminate
(2) What are the three conditions for price discriminations ?
A firm needs information on which consumers are elastic or inelastic. Without this info they would not know whom to increase prices and whom to decrease prices for
(3) What are the 3 conditions for price discrimination ?
Limiting reselling. For instance, train tickets will be lower for students as they are price elastic and so sneaky students may resell this to an adult for a higher price but lower than the adult train ticket price. The firm loses out on the profit as the adult does not buy the original adult ticket the train sold.
What are the strength and weakness of price discrimination ?
Strength is that there may be lower prices to poorer people. However a weakness can be that richer people get overpriced unfairly
How do you model price discrimination diagrams ?
You draw three graphs. two graphs are elastic and inelastic demand graphs. The third one is the total curve where you add the elasticity and inelasticity curves. First half of curve is inelastic as of higher prices and second half is more elastic as of lower prices. You draw the same prcedure for MR.
This time you draw a constant MC and AC curve. Show the differences in supernormal profit (mc=mr).
