Perfect competition Flashcards
Monopoly vs. Competition
A monopoly is the monopoly’s ability to influence the price of its output.
Monopoly effects on total revenue.
The output effect: More output is sold, so Quantity is higher, which increases total Revenue
The price effect: The price falls, so P is lower, which tends to decrease Total Revenue.
Welfare cost of economy equations
Consumer surplus = Willingness to pay for a good - the amount paid.
Producer surplus = amount producers receive for a good - cost of producing.
Total surplus = Consumer surplus + producer surplus
Price Discrimination.
Firms try to sell the same good to different consumers for a different price.
• Even though the cost of producing the product is the same
§ Price discrimination is a rational strategy for profit-maximizing monopolist
• Charging a price closer to one’s willingness to pay (WTP)
§ Price discrimination requires the ability to separate customers
according to their WTP
• Eg geographically, by age, income, etc.
• Energy/rail companies discriminate through setting higher prices at different times
of the day
• Note: perfect price discrimination = charge each consumer their own WTP
§ Price discrimination can raise economic welfare
• Through higher producer surplus, not higher consumer surplus
