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Econ > Topic 14 > Flashcards

Topic 14 Flashcards

1
Q

Monopoly
-2 features

A

1) no close substitutes: monopoly firm is the SOLE seller of a good
2) Barriers to entry: one supplier that is protected from competition

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2
Q

Why is a monopoly not possible if there are close substitutes?

A

because there is potential for competition even if it a substitute

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3
Q

What are the three types of barriers to entry

A
  • natural monopoly
  • monopoly of resourecs

-govt created monopoly

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4
Q

natural monopoly

A

market in which economies of scale enable one firm to supply entire market at the lowest possible cost!!!!!!

THE Long Run Average Cost curve is still sloping downward when it meets the demand curve

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5
Q

Monopoly of resources

A

occur if one firm owns a big portion of the key resource!!!!

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6
Q

Govt created monopolies

A

the govt gives a single firm the exclusive right to produce some food or service

-COPYRIGHT or Patent laws!!!!

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7
Q

How do monopolies choose price and output

A

They still use MR= MC
but MR is now a sloping downward line and not equal to price and demand, so they find the cross of MR and MC and then go upwards till they hit the hgihest price

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8
Q

What is the demand for the monopolys outpit

A

THE MARKET DEMAND

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9
Q

What is a monopolies marginal revenue, how is this different from a competitive firms?

A

Monopolies marginal revenue=TR2-TR1/Q2-Q1

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10
Q

What is a monopolies marginal revenue, how is this different from a competitive firms?

A

Monopolies marginal revenue=TR2-TR1/Q2-Q1

usually MR=Price, MR is a straight line of the market price

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11
Q

What is the relation of a monopolies MR and Price?

A

MR < Price at each level of output

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12
Q

WHAT IS THE THING ABOUT MARGINAL REVENUE

A

IT JUST MEANS THE EXTRA REVENUE EARNED FROM ONE MORE SALE!!!!

NOT THE TOTAL AMOUNT OF REVENUE A MONOPOLY EARNS

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13
Q

What is a monopolies marginal revenue even related to/caused by?

A

The elasticity of the demand curve,

if the demand curve is elastic, and the price falls, TOTAL revenue increases! (Marginal extra revenue is POSITIVE)

if the demand curve is inelastic, and the price falls, TOTAL revenue decreases (Marginal extra revenue is NEGATIVE)

if the demand curve is unit elastic, and the price falls, Total revenue stays the same (Marginal extra revenue is 0)

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14
Q

At what point does the monopoly produce?
but what is the twist?????

A

like every other firm, only when MR=MC because profit is maximized

THE MONOPOLY GETS TO SET THE PRICE AT WHICH THEY SELLLL THIS GOOD!!!!!!!!!!!!!!!!!!!!!!

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15
Q

What does the long run look like for monopolies?

A

IF THEY ARE MAKING A PROFIT!!! THEY CAN MAKE A PROFIT!! EVEN IN THE LONG RUN!

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16
Q

What is the supply curve composed of?

A

The horizontal sum of each firms marginal cost curve

17
Q

monopoly firm is a what?

A

PRICE MAKER

18
Q

natural monopoly

A

An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

19
Q

What is the difference in the sort of curve the monopoly faces and the competitive makret faces?

A

For monopoly: market demand curve (they are serving all of the market bc LRAC curve is declining=economies of scale)

For competitive market: perfectly elastic demand curve which is MR and which is also Price, because there ar eso manyu close substitutes

20
Q

average revenue always equals

A

average revenue always equals the price of the good

21
Q

Profit maximization steps for a monopoly

A
  1. Find where MC=MR (same as competitive firms; except firms would just sell it at this price, but NOT MONOPOLIES!!)
  2. THEN it uses its demand curve (market demand) to FIND the price it is going to charge customers
22
Q

why is marginal revenue always less than the price

A

when a monopoly increases its production by 1 unit, it must reduce the price it charges for every unit it sells (think about the demand curve); and this cut in price reduces revenue on the units it was already selling; HENCE, THE MR IS ALWAYS LESS THAN THE PRICE

23
Q

How do you know its a monopoly from the graph?

A

IS THE MR A STRAIGHT LINE DOWN? thats how you know bc in a competitive market the monopoly is the Price of the good in the market (horizontal)

24
Q

Do monopolists produce a socially efficient quantity?

A

HELL no, they underproduce to charge higher prices and to increase their revenues

CREAT DEADWEIGHT LOSS

25
Q

price discrimination.

A

not possible when a good is sold in a competitive market.

-rational strategy for a profit-maximizing monopolist.
-Price discrimination can raise economic welfare…can eliminate the inefficiency inherent in monopoly pricing. (it increases the welfar of producers and minimizes consumers but STILLLL BOOSTS WHOLE ECONOMIC WELFARE)

26
Q

hOW is it possibel for a firm to price discriminate?

A

Identify and separate different buyer types according to their
willingness to pay.

I Sell a product that cannot be resol

27
Q

two ways firms price discriminate

A

among groups of buyers

among units bought

28
Q

What does perfect price discrimination result in

A

monopoly increasing its output until the price of the last good sold is equal to marginal cost; MONOPOLY MAKES THE MOST POSSIBLE PROFIT!!! EATS UP ALL OF THE CONSUMER SURPLUS UNTIL ITS ONE TRIANGLE

29
Q

HOW CAN govts help monopoly issues?

A

regulation:
Marginal cost pricing
-subsidize monopolies
average cost pricing

competition laws

turn it public govt led

nothing at all

30
Q

Marginal cost pricing

A

when the govt sets a price for the monopoly to charge!!!

sets the price equal to the monopolys marginal cost because the quantity demadned at a price equal to the marginal cost is the efficient quantity

(this is where mc curve and demand curve itnersect= market equilibrium)

31
Q

so does marginal cost pricing solve everythinG?

A

no! because the average cost of the firm is exceeding the price (The lrac curve is above the price) SO FIRM INCURS A LOSS

THE MONOPOLY COULD LEAVE THE MARKET OR SHUTDOWN

32
Q

what can govts do when marginal cost pricing doesnt work?

A

they can subsidize the monopoly to cover the costs of their loss- but this means taxation which mean smore deadweight loss

33
Q

Aevrage cost pricing rule

A

Another price regulation which sets an average total cost the monopolies can charge! (this is a price ceiling)

this also causes deadweight losses :(
but basically, they produce the irght amount and they charge the right amount

Econ (20 decks)

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