Unit 7: Monopolies Flashcards
A monopoly is a…
The price charged by a monopoly is…than MC
Price maker
Price is greater than mc
Why can’t monopolies charge very high prices for their products?
Demand will go down, and they won’t make a profit
Is there an invisible hand for monopolies?
No
Are there barriers to entry?
Yes because they are the only seller in the market, other firms can’t enter and compete
3 main sources of barriers to entry?
- Key resource is owned by a single firm
- Government gives single firm exclusive rights to produce good/service
- Cost of production makes single producer more efficient than a large number of producers
What gives a monopoly a greater market power?
Owning a key resource
Natural monopoly
When do they arise?
Monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than two or more firms
Arises when economies of scale are over the range of output
Why is entering a market with a natural monopoly unattractive?
Other firms know they can’t achieve as low costs as Monopolists because entry means a firm would have a smaller price if the market
Monopoly vs. PC firm
MONOPOLY: only producer, demand curve slopes down, if prices rise, demand goes down, demand curve puts a constant strain in monopolys ability to profit from its market power
FIRM: small, price take, horizontal demand curve, products have perfect substitutes
Economies of scale as a cause of monopoly
Continually declining ATC curve leads to natural monopoly. When production is divided among more firms, each firm produces less and ATC rises. A firm can produce any amount at a small cost
Why does the demand curve slope down for a monopoly?
They are the only producer in the market and have to accept a low price if they want to sell more output
Where does a monopoly maximize profit?
At a Q where MR=MC. Then they use the demand curve to find a price where customers will buy that quantity
How would a government create a monopoly?
They would give one person or firm exclusive rights to sell a good or service
They might create a monopoly for public interest
Monopolys revenue
MR is always less than the price of a good
What are the two effects on total revenue when Q sold increases?
- Output effect: As more output is sold, Q increases
2. Price effect: price falls
Is there a price effect? Why/why not?
No, since a PC firm can sell any quantity at market price
What is the relationship between the demand curve and the MR curve?
They start at the same place, but MR deviates. MR is less than the price of the good, so MR lies below demand
AR curve
AR curve=demand curve
Where is the profit maximizing quantity?
Relationship between MR and price
Intersection of MR and MC curve
MR<p></p>
Why is there deadweight loss in a monopoly?
What does the triangle represent?
Because monopolies charge a price above MC and not all customers value that good at the same price, and won’t buy it. Q produced and sold will go down, below the socially efficient level
Monopolies produce less than the efficient quantity of output
Represents the surplus lost due to monopoly’s pricing
In a natural monopoly, what is the relationship between ATC and MC?
ATC curve declines and MC is less than ATC
Price discrimination
Charging different prices for the same good to different customers.
What can the government do as a response to monopolies?
- Try to make monopolies more competitive
- Regulate behavior of monopolies
- Turn private monopolies into public enterprises
- Do nothing
Anti-trust laws
Give the government ways to promote competition. Break up companies and prevent them from doing things that make it less competitive
How will governments regulate monopolies?
Subsidize or let monopolists charge at a price higher than MC
Who do government’s take public ownership of monopolies?
They will run the monopoly themselves.
How will a government do nothing with a monopoly?
No fix the inefficiencies
Socially optimal price
Demand=?
Is it above or below ATC?
What does it require?
Price where there is no deadweight loss
Exists when price=cost of producing the next unit of output
Demand=MC
Also called ALLOCATIVELY EFFICIENT
Below ATC
Requires a subsidy from the government to cover all costs so P=MC of producing one more unit of output
Fair market price
Exists where P=ATC or where D=ATC
also know as fair rate of return or break even price
Does the difference in a products price reflect the costs of production?
No
In a price discrimination, Demand curve=
Is there DWL or CS?
Demand curve=MR, they do NOT deviate
No DWL or CS
1st, 2nd and 3rd degrees of price discrimination
1st degree (aka perfect): willingness to pay 2nd degree(bulk items): how much the consumer buys 3rd degree(illegal!): location or attribute of the customer
?=?
Socially optimal
MC=Demand
?=?
Maximizing revenue
MR=0
?=?
Profit maximizing
MC=MR
?=?
Natural monopoly
ATC=demand
MC=demand
?=?
Unregulated
MR=0
MC=MR
?=?
Regulated monopoly
MC=demand
ATC=demand
