Topic 14 Flashcards
Monopoly
-2 features
1) no close substitutes: monopoly firm is the SOLE seller of a good
2) Barriers to entry: one supplier that is protected from competition
Why is a monopoly not possible if there are close substitutes?
because there is potential for competition even if it a substitute
What are the three types of barriers to entry
- natural monopoly
- monopoly of resourecs
-govt created monopoly
natural monopoly
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
Monopoly of resources
occur if one firm owns a big portion of the key resource!!!!
Govt created monopolies
the govt gives a single firm the exclusive right to produce some food or service
-COPYRIGHT or Patent laws!!!!
How do monopolies choose price and output
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
What is the demand for the monopolys outpit
THE MARKET DEMAND
What is a monopolies marginal revenue, how is this different from a competitive firms?
Monopolies marginal revenue=TR2-TR1/Q2-Q1
What is a monopolies marginal revenue, how is this different from a competitive firms?
Monopolies marginal revenue=TR2-TR1/Q2-Q1
usually MR=Price, MR is a straight line of the market price
What is the relation of a monopolies MR and Price?
MR < Price at each level of output
WHAT IS THE THING ABOUT MARGINAL REVENUE
IT JUST MEANS THE EXTRA REVENUE EARNED FROM ONE MORE SALE!!!!
NOT THE TOTAL AMOUNT OF REVENUE A MONOPOLY EARNS
What is a monopolies marginal revenue even related to/caused by?
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)
At what point does the monopoly produce?
but what is the twist?????
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!!!!!!!!!!!!!!!!!!!!!!
What does the long run look like for monopolies?
IF THEY ARE MAKING A PROFIT!!! THEY CAN MAKE A PROFIT!! EVEN IN THE LONG RUN!
What is the supply curve composed of?
The horizontal sum of each firms marginal cost curve
monopoly firm is a what?
PRICE MAKER
natural monopoly
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
What is the difference in the sort of curve the monopoly faces and the competitive makret faces?
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
average revenue always equals
average revenue always equals the price of the good
Profit maximization steps for a monopoly
- Find where MC=MR (same as competitive firms; except firms would just sell it at this price, but NOT MONOPOLIES!!)
- THEN it uses its demand curve (market demand) to FIND the price it is going to charge customers
why is marginal revenue always less than the price
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
How do you know its a monopoly from the graph?
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)
Do monopolists produce a socially efficient quantity?
HELL no, they underproduce to charge higher prices and to increase their revenues
CREAT DEADWEIGHT LOSS
price discrimination.
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)
hOW is it possibel for a firm to price discriminate?
Identify and separate different buyer types according to their
willingness to pay.
I Sell a product that cannot be resol
two ways firms price discriminate
among groups of buyers
among units bought
What does perfect price discrimination result in
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
HOW CAN govts help monopoly issues?
regulation:
Marginal cost pricing
-subsidize monopolies
average cost pricing
competition laws
turn it public govt led
nothing at all
Marginal cost pricing
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)
so does marginal cost pricing solve everythinG?
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
what can govts do when marginal cost pricing doesnt work?
they can subsidize the monopoly to cover the costs of their loss- but this means taxation which mean smore deadweight loss
Aevrage cost pricing rule
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
