Output Decisions Flashcards
Define a barrier to entry?
Factors that prevent entry into markets with large producer surpluses
Define natural monopoly.
A market in which it is efficient for a single firm to produce the entire industry output
What are three characteristics of a monopoly market?
- ) One seller
- ) Unique good
- ) Barrier to entry
Can a monopolist effect the equilibrium price?
Yes they influence the market price, and can shoot the price level they want to see at
What type of demand curve to monopolist face?
Downward sloping
Define network good.
A good whose value to each consumer increases with the number of other consumers of the product
Name three types of barriers to entry.
- ) Brand loyalty
- ) Government regulation
- ) Extreme scale economies
What is economics of scale?
Average total cost decreases as output decreases
What is diseconomies of scale?
Average total cost increases as output increases
What shape ATC shows both diseconomies of scale and economies of scale?
U shaped
What is meant by extreme economies of scale?
Economies of scale at all Q, ATC always decreases in Q
Why does a monopolist want to serve the whole market?
At this point the ATC is the lowest
What shape is the ATC curve for monopolists?
Downward sloping curve
Why does extreme economies to scale provide a natural barrier to entry?
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
Draw the MC, ATC and AFC on a graph for a monopolist.
Picture
How to monopolist maximise their profit?
Produce at Q where MR = MC
How to the sizes of MR and P relate for monoplist?
MR < P
Why is MR < P for monopolist?
To sell more output he must reduce the price for every single output
What must dP/dQ be for monopolist who have market power? And why?
< 0, as it supplies more market price goes down
How do the gradients of the demand curve and the MR curve relate for monopolist?
MR curve is always twice as steep
What shape demand curve do monopolists face?
Linear, straight line
Why is the gradient of the MR twice as steep as the demand curve?
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
How can a monopolist sell more of its good?
Decrease its price
What region on the graph of a monopolist show profit?
The square below P* and above ATC*
What region on the graph of a monopolist show producer surplus?
The square below P* and above the MC like
What is total economic surplus?
The amount of benefit the benefits the buyers or sellers can gain by participating in the market
What is economic surplus made up of?
Producer surplus and consumer surplus
Show profit and producer surplus on a graph of ATC, MC, demand curve.
Picture
Why in a competitive market is economic surplus maximised?
P = MR = MC, so every buyer willing to pay MC is getting the good so everyone possible is participating in the market
Why is there an increase in producer surplus in a monopoly market?
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
Between competitive and monopoly markets which one is efficient and inefficient?
Competitive - efficient
Monopoly - inefficient
What does a monopolist power generate as it decreases economic surplus?
Deadweight loss
How does a monopolist effect economic surplus?
Decreases
Why does a monopolist cause an increase in economic surplus?
Even though producer surplus increases it doesn’t increase as much as consumer surplus decreases
How consumer surplus, producer surplus and deadweight loss for a monopolist on a graph.
Picture
Name two things that can be done to reduce inefficiencies caused by monopolies.
- ) Reduce barrier to entry
2. ) Direct price regulation
How does reducing barrier to entry stop the inefficient of a monopoly market?
New firms can enter so the market is no longer a monopoly
Name three ways to reduce barrier to entry.
- ) antitrust laws
- ) tax breaks for new entrants
- ) lifting import bans
What two ways can governments implement direct price regulation?
MC pricing rule or ATC price rule
What is a MC price rule?
Gets monopolies to charge the marginal cost of production so the efficient output is produced
Why don’t firms like direct price regulations?
They make less money and it cause the existing market to collapse
What is an ATC price rule?
Gets monopolies to charge the ATC
Why do ATC price rules have less effect than MC price rules?
If P = ATC > MC it means there are still market inefficiencies
Which price rule doesn’t completely reduce deadweight loss?
ATC
What is a measure of market power?
The Lerner index (ℷ)
What is the equation for the Lerner index?
ℷ = (P-MC)/P
What is the range of the Lerner index?
0 to 1
What value of the Lerner index shows a firm with a lot of market power ?
1
What value of the Lerner index shows a firm that is a price taker?
0
What is the second way to write the Lerner index?
-1/eD
What does eD stand for?
Price elasticity of demand
What value of eD do you have for firms with a lower of market power?
0
Why is ℷ < 1?
eD > 1, as monopolista never produce at inelastic portion of demand curve
Define markup.
The percentage of the firm’s price that is greater than its marginal cost
Define Lerner index.
A measure of a firm’s markup, or its level of market power
