Spring week 5-8 Flashcards
market features of a monopoly
No. of sellers 1
entry closed
market power total
product differentiated
definition of monopoly
a single firm that supplies an entire market
how do natural monopolies occur
when there are economies of scale to production e.g average costs fall until reaching an output that represents the whole market
examples of monopolies arising
property rights
limited access to essential inputs
how is profit measured
vertical distance between total revenue and total cost curves
how is profit maximized
when marginal revenue equals marginal cost
why is monopoly inefficient
output should be increased until consumers willingness to pat is no higher than marginal cost
but monopolies marginal revue is lower than the prevailing price so to profit maximize lower output and a price mark up relative to marginal cost
disadvantages
price are high consumer surplus is low
output is lower than socially optimum so we see deadweight loss
monopolist isnt forced to cost minimize efficiently
advantages
if MC is downward sloping socially efficient is loss making so good may not be produced without monopolist
potential for supernormal profit creates incentive for firms to invest in R and D
supernormal profits allow monopolist to be risk taker which public and private sector cant do
how to eliminate DWL
give intervention to break monopoly
regulation price cap
monopolist could use price discrimination
first degree price discrimination
charging each consumer her own maximum willingness to pay, eliminating DWL but no consumer surplus
second degree price discrimination
offers a menu of pricing options e.g versioning
third degree price discimination
segmenting the market into groups of consumers e.g adults and children prices
advantages of price discrimination
reduces DWL and increases producer surplus
how is consumer surplus effected by price discrimination?
effect on consumers surplus mixed either increase, decrease or eliminate
