Monopoly Flashcards
monopoly
one supplier of a good that has no close substitutes
monopsony
one buyer
how?
- exclusive control over inputs
- economies of scale
- patents
- network economies
- government licensing
what is a patent?
government granted to protect the intelligence of a firm/product. e.g pharmaceutical companies protecting drugs
economies of scale?
division of labour, technical, bulk buying, marketing, financial, external
bulk buying
whereby big companies can buy at large quantities lowering average costs, lower transport costs, less packaging
financial
better rate of interest than smaller firms. (better for borrowing money)
marginal revenue and price
the change in its revenue from selling one unit
perfect competition (MR)
the marginal revenue is lined horizontal as price is predetermined by the markets and firms are the only price takers.
profit maximisation
MR=MC
revenue maximisation
AR=0 (P=AR)
Elasticity
PED, PES, XED, YED
Inelastic
less than one
elastic
greater than one
unitary elastic
1
trade off
monopoly faces a trade off between charging higher prices, or lower quantity / lower prices and higher quantity.
MR equation
MR= p(1+ 1/e)
Price descrimination
practice where the monopolist charges different prices to different buyers, different preferences and levels of purchasing power
1st degree price descrimination
prices varies according to customers willingness and ability to pay - for example an auction. Creates a consumer surplus; the difference between what consumers are willing to pay and what they actually pay
2nd degree
charging different prices for quantities; quantity discounts for bulk buying - available at a lower unit price. they will charge a price that COVERS the MARGINAL cost of production - to extract some of the consumer surplus
3rd degree
charging different prices to buyers in completely separate markets - some will be less price sensitive RELATIVE to other markets.
must prevents ARBITRAGE (buying in the second market and then selling for higher price in the first market) for example tickets, airfares etc
monopolistic competition
many buyers and sellers, low barriers to entry, slightly differentiated products, firms enter the markets until no firm can enter profitability, downward sloping demand curve, increasing returns to scale
equilibrium (monopolistic)
long run - price is equal to the marginal cost, price equals average cost - as no firm can enter profitability
perfect competition
many buyers and sellers, low barriers to entry, differentiated products, profit maximising,
MC vs PC
monopolies are less efficient as they do not produce on their minimum points on LRAC, profit maximisation exhibits increasing returns to scale, profitability is the same in the long run for both
monopoly
one producer, many consumers, high barriers to entry (legal barriers), lack of economic competition, lack of substitutes,
spatial interpretation
evenly spread restaurants, consumers are evenly spread
optimum number of locations?
the firm incurs fixed cost for establishment of new outlets
if transportation costs =0 optimum to have one outlet,
if the number of outlets increase then the transportation costs decrease,
causing a trade of between fixed costs and the transportation cost and cost of the meal
optimum number
is on the minimises the sum of transportation and meal costs.
