Monopoly Flashcards
Define monopolist
A firm that is only the producer of a good with no close substitutes
What is market power?
The ability of a firm to raise prices
Why do monopolies exist?
Because profit will not persist in the long run unless there is a barrier to entry
Give 3 forms of profit for monopolists
- Control of natural resources or inputs
- Technological superiority
- Government made barriers including patents and copyrights
When does a natural monopoly exist?
When increasing returns to scale provides a large cost advantage to a single firm
Is a quantity of output produced more cheaply by one large firm or smaller firms?
One large firm
Define network externality
The value of a good or service to an individual increasing as more others use the same good or service
What does patent give an inventor and copyright give a creator?
Temporary monopoly in the use or sale of an invention
Sole rights to profit from that work
What is the difference between competitive firms and monopolists?
Competitive firms can’t choose price whereas monopolists can
What opposing effects does an increase in production have on revenue?
- Quantity Effect - One more unit is sold, increasing total revenue by the price at which the unit is sold
- Price Effect - To sell the last unit, the monopolist must cut the market price on all units sold. This decreases total revenue
What are the 2 steps to profit maximisation?
- Choosing a quantity
* Choosing a price
Why doesn’t monopoly have a supply curve?
Because monopolist’s control prices so there is no set relationship between price and quantity supplied
What happens to consumer surplus when a monopoly raises prices and lowers the quantity?
It falls
What is antitrust policy?
When the government policies used to prevent or eliminate monopolies
Give 2 policy responses to natural monopoly
- Public ownership (but they’re often poorly run)
- Price regulation - a price ceiling imposed on a monopolist does not create shortages if it is not set too low
