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microeconomics > séance 6 > Flashcards

séance 6 Flashcards

1
Q

what is the key points to define a monopoly?

A
  • Only one firm/supplier in the industry
  • Barriers to entry: limits market entry
  • Market power
  • wants to maximize profit
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2
Q

what are the 3 types of barriers to entry?

A
  • economic barriers
  • legal barriers
  • deliberately created barriers by actions taken by incumbent firms
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3
Q

when it comes to profit maximization, what is the difference between firms in perfect competition and monopoly?

A

profit maximization MR(q) = MC(q), but P>MR in monopolies, where as P=MR in perfect competition

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4
Q

what is the difference between the firm in perfect competition demand curve and the monopoly demand curve?

A

the demand curve of a perfect competition firm is horizontal: perfectly elastic.
the demand curve of a monopoly is a downward slope.

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5
Q

what can we say about the marginal revenue curve of a monopoly?

A

the marginal revenue curve lies below the demand curve

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6
Q

what is the trade off that monopolies face?

A

selling more units or selling at a higher price

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7
Q

what are the steps to be taken in order for the monopolist’s to find the optimal decision?

A

1) Solve Q: MR(Q) = MC(Q)
2) Find P using the demand curve
3) Compute the profit(Q) = R(Q) – C(Q) or profit(Q) = [P – AC(Q)] x Q

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8
Q

can monopolies have negative profits?

A

yes, monopolies can have negative profits in the short run: if F cost changes = average cost is higher

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9
Q

what is the definition of market power?

A

The ability to charge a price greater than the marginal cost without losing all its customers

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10
Q

what is a measure of market power?

A

the lerner index

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11
Q

the more market power a firm has, the higher…

A

the more market power a firm has, the higher the margin between price and marginal cost will be

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12
Q

how is the lerner index computed?

A

L=(P-MC)/P

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13
Q

a perfect competition firm has a lerner index of L=…

A

L=0, because P=MC

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14
Q

in regardes to the lerner index, the larger the difference between P and MC, the larger…

A

the larger L and the greater market power

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15
Q

if L=0,67 for a certain monopoly, what does that mean?

A

it means that, at the margin, 67% of the sales price contributes to the monopolist’s profit

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16
Q

how can the lerner index be rewritten in regards to the elasticity of demand?

A

L = -1 / Ed

17
Q

why does trade-off depend on the elasticity of demand?

A

when demand is very elastic, an increase in price to increase the profit margin leads to a large decrease in volume; in that case, volume is more important than margin. when demand is fairly inelastic, one can achieve a good margin without loosing too much volume

18
Q

TF: market power is directly linked to the elasticity of demand of the firm’s product

A

True

19
Q

what does the rewritten form of the lerner index tells us? (L = -1/Ed)

A

when monopolists set the profit-maximizing price, its profit margin, expressed as a % of the price, is inversely proportinal to the elasticity of demand.

20
Q

the more inelastic is the demand, the higher…

A

the more inelastic is the demand, the higher… the higher margin the monopolist can charge

21
Q

what can we say about the market power and the margin of a monopoly facing elastic demand?

A

if elastic demand, Ep < -1, small L = weak market power and low margins

22
Q

what can we say about the market power and the margin of a monopoly facing inelastic demand?

A

if inelastic demand, -1 < Ep < 0, large L = strong market power and high margins

23
Q

where does market power comes from and what are the sources of market power?

A

Market power comes from demand inelasticity:

  • Lack of substitute products
  • Barriers to entry
  • Transaction costs
  • Legislation
24
Q

what is the difference between the price in a competitive market and the price in the case of a monopoly?

A
  • in a competitive market, P=MC

- under monopoly or market power, P>MC

25
Q

why do monopolies lead to economic inefficiencies?

A

because a part of the surplus is lost: the DWL represents the social loss = loss economic efficiency and not just a transfer from consumers to the monopolist

26
Q

what does the DWL measures in the case of a monopoly?

A

The DWL due to the monopoly provides a measure of how much worse-off people are paying the monopoly price than paying the competitive price.

27
Q

what are the characteristics of a monopolistic competition?

A
  • many firms and none have complete control on the market price
  • firms have some market power
  • firms compete by selling differentiated products that are highly substitutable for one another but not perfect substitutes: cross-price elasticities of demand are large but not infinite
  • free entry and exit
28
Q

what is product differentiation?

A

Product differentiation is the effort by firms to produce goods or services that are superior to those of other firms

29
Q

what are the common types of differentiation?

A
  • physical characteristics (quality, service, etc)
  • convenience (location or time)
  • lifestyle
30
Q

what is a good tool for product differentiation?

A

advertising

31
Q

what creates market power under monopolistic competition?

A

product differentiation

32
Q

a monopolist faces a …. demand curve

A

a monopolist faces a downward sloping demand curve

33
Q

a monopolist maximizes profits when …

A

MR(Q)=MC(Q)

34
Q

the monopoly price is … than the competitive price

A

the monopoly price is higher than the competitive price

35
Q

the monopolist’s output is … than the competitive output

A

the monopolist’s output is lower than the competitive output

36
Q

what does the existence of a monopoly leads to?

A
  • inefficient resource allocation
  • decrease in consumer welfare
  • overall loss for society: the DWL
37
Q

TF: a monopoly can earn persistent economic profits

A

T, provided that source of monopoly power is not eliminated

38
Q

TF: monopolistically competitive can earn positive economic profit?

A

A monopolistically competitive firm can earn economic profits in the short run, but entry by competing brands will erode these profits over time. Economic profit will be equal to 0 in the long run

microeconomics (11 decks)

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