Unit Seven Flashcards
A monopoly is a price maker
It sets its price based on demand
Market power = market failure
Customers have to pay more than the costs of production
Monopoly’s demand curve
The monopoly has to lower price to sell more output
-law of demand
Faces a similar demand curve to PC markets
-it could have many buyers
It has no supply curve
-its demand curve sets the amount it’s willing to supply
The monopolist’s marginal revenue curve
The marginal revenue curve deviates from demand curve because when the monopoly lowers its price, it lowers it on all goods sold, not just the next good
Revenue maximizing point
A monopoly maximizes revenue where MR = 0
MR = 0 corresponds to a point where the demand curve is unit elastic
Quantities to the left correspond to the elastic portion of the demand curve
Quantities to the right correspond to the inelastic portion of the demand curve
Monopoly
Single firm that produces a unique product
Only one firm
Two formulas for profit
(P - ATC) x Q = profit
Total revenue - total costs = profit
Profit maximization in a monopoly
An unregulated monopolist will produce at the profit maximizing level of output where MC = MR
Find the quantity that corresponds to MC = MR
Find the price that corresponds to that Q on the demand curve
The graph of a profit maximizing monopoly
A monopoly is inefficient because:
-price in a monopoly > price in a PC a firm
-quantity in a monopoly < quantity in a PC market
Monopolies can earn long-run profits
There is deadweight loss
Socially optimal price
Price where there is no deadweight loss
Exists where price equals the cost of producing the next unit of output
D = MC or P = MC (since D = P)
-it is allocatively efficient
Can be below the average total cost curve
-production at this level requires a subsidy
Where a perfectly competitive firm/market produces
The socially optimal price in a monopoly
Where MC and D intersect
Fair market price
Exists where P = ATC OR where the demand curve = ATC
Also known as:
-the fair rate of return
-the break-even price
Regulated monopolies
Typically the government will allow some monopolies, but require them to lower price
-sometimes regulated price = MC
-sometimes regulated price = ATC
Usually: price in a perfectly competitive firm < price in a regulated monopoly < price in an unregulated monopoly
Price discrimination
The difference in a product’s price DOES NOT reflect the costs of production
In a perfectly price discriminating monopoly (aka first degree price discriminating monopoly):
-demand curve = MR curve
-there is no deadweight loss or consumer surplus
The business practice of selling the same good at different prices to different customers
Price discrimination is not possible in a PC market
the marginal revenue of a price ceiling/price floor
P = MR for a set price such as a price ceiling or floor
with a binding price ceiling, profit is maximized where the ceiling = MC
