Monopoly Flashcards
why is MR less than demand for all imperfect competition?
monopoly must lower the price of all units to sell more so the marginal revenue (MR -additional revenue) is the price minus the revenue they could have made by selling previous units at a higher price
Lose revenue from all the previous units you could have sold at a higher price
what is a monopoly?
- unique good with no close substitutes
- price maker (power to set its price)
- one firm in industry, no competition
- very high barriers to entry
what does a monopoly graph look like and why?
a price setter, determines the price, thus has the discretion to set as high or as low as they wish
since monopolies cannot price discriminate,
to sell more output, the monopolist must lower the price in order to get people to buy the increased output. As it raises output, it must lower the price more and more, and this causes the increase in total revenue to get smaller. As the price falls to very low levels, revenue actually declines
eg. monopoly sells at 100. if they want to sell additional unit, lower price to 90. must sell 90 to everyone, meaning they lose revenue from selling unit at 100
- when MR= MC, therefore, Q1
- Q1 matches P2
- box P2 A Q1 Q0
- Triangle P1 A P 2
find total cost
if monopoly is making a profit, will other firms enter and take the profit in the long run?
no
where is revenue maximising qty? and why?
Q2 since revenue maximising qty occurs when MR (marginal revenue) =0
when MR is decreasing, but still positive, total revenue is increasing
when MR reaches 0, total revenue reaches its max
when MR is decreasing, but negative, total revenue is decreasing
why may a monopoly decide not to produce qty to maximise revenue?
better to maximise profit where MR = MC
what is the socially optimal qty and where is it?
Q3
when price of what people want to pay = additional cost of producing that unit (D=MC)
society wants this many units
where is deadweight loss?
below demand (D)
above MC
Between socially optimal price and profit maximising price
Inefficient because society wants monopoly to produce at Q3, but monoplies would rather maximise profit, producing at Q1, causing dead weightloss
where is socially optimal consumer surplus?
consumer surplus at socially optimal qty (Q3)
consumer surplus that would exist if this would a perfectly competitive market and they are producing socially optimal qty at Q3
how may government regulate a monopoly in terms of imposing a price ceiling at socially optimal price and qty?
what is the problem with this?
by imposing a price ceiling, so that monopoly will produce at a socially optimal qty (MC=D)
Produce qty (QSO) and price (PSO) that society wants
monopoly will be making a loss (ATC is higher)
qty to produce with no economic profit?
where total revenue = total cost BREAKEVEN POINT
at Q4
what will happen to qty and price if there is a per unit tax?
unlike a lump sum tax, a per unit tax, will shift marginal cost, causing MC to go up. At new MR=MC,
- Qty falls
- Price rises
This will be worse than if a monopoly was unregulated and produced at MC=MR Which is why government should not tax a monopoly
what will happen if there is a lump sum tax?
price and qty will remain the same
it will change fixed costs
how much should a monopoly produce?
where MR = MC
what price should the monopoly charge?
charge what people are going to pay. draw line from MR=MC qty to demand curve
how to determine profit a monopoly makes?
price down to ATC
calculate
total revenue
Total cost
profit
profit per unit
TR = 250
TC = 200
Profit = 50
Profit per unit =5
what does the deadweight loss in a monoply show?
that the monopoly is inefficient
in a perfectly competitive market, the consumer surplus and producer surplus is
what you’re willing to pay and what you did pay: consumer surplus
what you’re willing to sell and what you did sell:
Producer surplus
the qty a monoply would produce if they were perfectly competitive
where is the deadweight loss in monopoly?
consumer surplus and producer that used to exist when there was perfect competition, but does not exist anymore as the monopoly is producing less units –> inefficiency
where is the monopoly’s consumer surplus?
price they are wiling to pay and the price that they paid for monopoly
where is the monopoly’s producer surplus?
what they are willing to sell it for and what they did sell it for as a monopoly
according to the total revenue test, how can you determine elasticity?
when a monopoly is unregulated,
monopoly has discretion in selecting the qty (QM) to produce (MR=MC), and the respective price (PM) (price at qty MR=MC, where Q1 to Demand line)
how may a government regulate a monopoly?
imposing a price ceiling at
- Fair return price PFRand qty _ QFR_
- socially optimal price PSOand qty QSO
Describe how a government may regulate a monopoly by imposing a price ceiling at fair return price and qty
This is where ATC= D
that is where, total revenue will always equal total cost (TC=TR)
what does lump sum tax or subsidy affect?
it will affect the fixed costs, specifically Average Fixed Costs (AFC) and average total costs (ATC)
what does per unit tax or subsidy affect?
variable cost, specifcally,
- average variable cost (AVC)
- average total cost (ATC)
- Marginal cost (MC)
a per unit subsidy on a monopoly will
cause MC to shift to the right
- Reducing price
- and increasing qty
and therefore, producing at a socially optimal price and qty
how to maximise total revenue for a monopoly?
when MR=0
since this is the peak of total revenue
how to maximise consumer and producer surplus in a monopoly?
by producing a socially optimal qty and selling it at the according price
this will make the consumer and producer surplus that of a perfect competition
in a price discriminating monopoly, why does MR=D
they don’t have to lower price of previous unit. To sell another unit, they lower price of the next unit, but the prices of previous units remain the same
charge different people different prices
in a price discriminating monopoly,
where is price
where is consumer surplus?
no set price, as prices are different
no consumer surplus (people who are willing to pay a certain amount eg. 100, 90, 80, can pay that amount)
where is profit in a price discriminating monopoly and why?
charge multiple prices and convert consumer surplus into profit
profit is therefore larger than a non-price discriminating monopoly
what qty are price discriminating monopolies producing?
they are producing the qty at allocative efficiency/ socially optimal qty where MC=D
but they are charging a higher price, than the price at equillibrium in perfect competition
Since the monopoly’s demand curve is downward facing, if a monopoly charges a higher price,
the quantity demanded declines along the demand curve. With a higher price, fewer people buy the item, but with no competitors to undercut that higher price, **there is still some demand for the product. **
what is marginal revenue?
Change in TR/ Change in Q
what is marginal cost?
change in TC/ change in Q
how is profit determined?
TR - TC
what is average revenue?
AR = TR/Q
when does a monopoly make a loss?
ATC is greater than the price at which MR=MC
If P< AVC, firm should shutdown
compared to a competitive industry,
monopoly exploits its market power by holding back on the quantity produced and causing the price to rise compared with the competitive equilibrium.
why does a monopoly create deadweight loss?
A monopoly creates a deadweight loss because it restricts output below what the competitive market would produce. The cost is measured by the deadweight loss, which is the reduction in the sum of consumer plus producer surplus.
where is deadweight loss?
difference between price of socially optimal qty and price of profit maximising qty
where is consumer surplus?
where is producer surplus?
Why do monopolies price discriminate?
- take advantage of consumers with Different Price Elasticities of Demand e.g. charge higher for inelastic groups when using 3rd degree price discrimination
- maximise profits
why may a monopoly choose to charge different prices according to consumers’ price elasticity of demand?
it is optimal to charge a lower price to the high-elasticity group and a higher price to the low-elasticity group
how do monopolies price discriminate through quantity discounts or premiums?
If the monopoly can charge a higher price to customers who buy only a little, profits can increase, as shown on the upper left. If the monopoly can give a discount to people who purchase a lot, it can also increase profits, as shown on the upper right.
how may deadweight loss be reduced by price discrimiation?
the deadweight loss from a monopolist occurs because production is too low. If price discrimination allows more production, then it reduces deadweight loss. (e.g. by lowering price to consumers who purchase in large qty)
what is 1st degree price discrimination
2nd degree
3rd degree
1st degree: setting different prices per customer
2nd degree: setting prices and letting people choose
e.g. monopolists offer different qty and/or price bundles
3rd degree: setting different prices per group e.g.
Monopolists identify separate buyers of a good who differ in demand for a good and charge different prices e.g. students for movies, pensioners
