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Economics - Micro > Output Decisions > Flashcards

Output Decisions Flashcards

1
Q

Define a barrier to entry?

A

Factors that prevent entry into markets with large producer surpluses

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2
Q

Define natural monopoly.

A

A market in which it is efficient for a single firm to produce the entire industry output

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3
Q

What are three characteristics of a monopoly market?

A
  1. ) One seller
  2. ) Unique good
  3. ) Barrier to entry
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4
Q

Can a monopolist effect the equilibrium price?

A

Yes they influence the market price, and can shoot the price level they want to see at

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5
Q

What type of demand curve to monopolist face?

A

Downward sloping

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6
Q

Define network good.

A

A good whose value to each consumer increases with the number of other consumers of the product

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7
Q

Name three types of barriers to entry.

A
  1. ) Brand loyalty
  2. ) Government regulation
  3. ) Extreme scale economies
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8
Q

What is economics of scale?

A

Average total cost decreases as output decreases

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9
Q

What is diseconomies of scale?

A

Average total cost increases as output increases

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10
Q

What shape ATC shows both diseconomies of scale and economies of scale?

A

U shaped

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11
Q

What is meant by extreme economies of scale?

A

Economies of scale at all Q, ATC always decreases in Q

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12
Q

Why does a monopolist want to serve the whole market?

A

At this point the ATC is the lowest

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13
Q

What shape is the ATC curve for monopolists?

A

Downward sloping curve

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14
Q

Why does extreme economies to scale provide a natural barrier to entry?

A

If a new firm tries to enter the market the existing firm can lower their price to drive them out, the consumer will only buy from the cheapest seller

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15
Q

Draw the MC, ATC and AFC on a graph for a monopolist.

A

Picture

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16
Q

How to monopolist maximise their profit?

A

Produce at Q where MR = MC

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17
Q

How to the sizes of MR and P relate for monoplist?

A

MR < P

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18
Q

Why is MR < P for monopolist?

A

To sell more output he must reduce the price for every single output

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19
Q

What must dP/dQ be for monopolist who have market power? And why?

A

< 0, as it supplies more market price goes down

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20
Q

How do the gradients of the demand curve and the MR curve relate for monopolist?

A

MR curve is always twice as steep

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21
Q

What shape demand curve do monopolists face?

A

Linear, straight line

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22
Q

Why is the gradient of the MR twice as steep as the demand curve?

A 
Say P = aQ + b (as it is linear)
We have TR = P * Q
TR = aQ*2 + bQ
MR = the differential of TR = 2aQ + b
So the gradient is twice as much
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23
Q

How can a monopolist sell more of its good?

A

Decrease its price

24
Q

What region on the graph of a monopolist show profit?

A

The square below P* and above ATC*

25
Q

What region on the graph of a monopolist show producer surplus?

A

The square below P* and above the MC like

26
Q

What is total economic surplus?

A

The amount of benefit the benefits the buyers or sellers can gain by participating in the market

27
Q

What is economic surplus made up of?

A

Producer surplus and consumer surplus

28
Q

Show profit and producer surplus on a graph of ATC, MC, demand curve.

A

Picture

29
Q

Why in a competitive market is economic surplus maximised?

A

P = MR = MC, so every buyer willing to pay MC is getting the good so everyone possible is participating in the market

30
Q

Why is there an increase in producer surplus in a monopoly market?

A

P > MR = MC, so there are buyers willing to pay MC that aren’t getting the good and so output is underproduced relative to the efficient level

31
Q

Between competitive and monopoly markets which one is efficient and inefficient?

A

Competitive - efficient

Monopoly - inefficient

32
Q

What does a monopolist power generate as it decreases economic surplus?

A

Deadweight loss

33
Q

How does a monopolist effect economic surplus?

A

Decreases

34
Q

Why does a monopolist cause an increase in economic surplus?

A

Even though producer surplus increases it doesn’t increase as much as consumer surplus decreases

35
Q

How consumer surplus, producer surplus and deadweight loss for a monopolist on a graph.

A

Picture

36
Q

Name two things that can be done to reduce inefficiencies caused by monopolies.

A
  1. ) Reduce barrier to entry

2. ) Direct price regulation

37
Q

How does reducing barrier to entry stop the inefficient of a monopoly market?

A

New firms can enter so the market is no longer a monopoly

38
Q

Name three ways to reduce barrier to entry.

A
  1. ) antitrust laws
  2. ) tax breaks for new entrants
  3. ) lifting import bans
39
Q

What two ways can governments implement direct price regulation?

A

MC pricing rule or ATC price rule

40
Q

What is a MC price rule?

A

Gets monopolies to charge the marginal cost of production so the efficient output is produced

41
Q

Why don’t firms like direct price regulations?

A

They make less money and it cause the existing market to collapse

42
Q

What is an ATC price rule?

A

Gets monopolies to charge the ATC

43
Q

Why do ATC price rules have less effect than MC price rules?

A

If P = ATC > MC it means there are still market inefficiencies

44
Q

Which price rule doesn’t completely reduce deadweight loss?

A

ATC

45
Q

What is a measure of market power?

A

The Lerner index (ℷ)

46
Q

What is the equation for the Lerner index?

A

ℷ = (P-MC)/P

47
Q

What is the range of the Lerner index?

A

0 to 1

48
Q

What value of the Lerner index shows a firm with a lot of market power ?

A

1

49
Q

What value of the Lerner index shows a firm that is a price taker?

A

0

50
Q

What is the second way to write the Lerner index?

A

-1/eD

51
Q

What does eD stand for?

A

Price elasticity of demand

52
Q

What value of eD do you have for firms with a lower of market power?

A

0

53
Q

Why is ℷ < 1?

A

eD > 1, as monopolista never produce at inelastic portion of demand curve

54
Q

Define markup.

A

The percentage of the firm’s price that is greater than its marginal cost

55
Q

Define Lerner index.

A

A measure of a firm’s markup, or its level of market power

Economics - Micro (12 decks)

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