Week 3 Flashcards
Perfect competitor can and can’t…
- Can sell all it wants at the current price
- Can’t raise price –> firm has no market power
Market power mechanism
The less demand falls when I raise my price, the greater my market power
Monopoly definition
- Extreme case of market power
- A monopolist’s demand is the market demand
Marginal analysis tells us that maximization of profits is achived at Q where: MR = MC. What changes with a monopoly?
- He faces the whole market demand
- He doesn’t take the price as fixed: if he supplies more, needs to drop the price on all units (he sets one price) - there is a price/quantity trade off
What changes with a monopolist in terms of Marginal Revenue?
- Perfect competition:
- MR = P
- Monopolist
- MR = Price - Rev. loss < P
Consumer surplus
Consumer surplus is an economic measure of consumer benefit, which is calculated by analyzing the difference between what consumers are willing and able to pay for a good or service relative to its market price, or what they actually do spend on the good or service. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.
Producer surplus
Producer surplus is an economic measure of the difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good. The difference, or surplus amount, is the benefit the producer receives for selling the good in the market. Producer surplus is generated by market prices in excess of the lowest price producers would otherwise be willing to accept for their goods
Deadweight loss
A deadweight loss is a cost to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings, such as price controls and rent controls; price floors, such as minimum wage and living wage laws; and taxation are all said to create deadweight losses.
A number of limitations to the free market ideal
- Formation of cartels, abuse of dominant position… need for antitrust rules
- Problems of asymmetric information can lead to breakdown of markets… need for regulation of information disclosure
- Problem of externalities not captures by price… need for regulation
Inverse elasticity rule
Optimal mark-up is inversely proportional to elasticity of demand
Cost plus pricing - elasticity
When selling to a market with less elastic demand, it is optimal to apply a higher mark-up over cost.
Price discrimination definition
Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller charges each customer the maximum price that he is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.
Types of Price Discrimination
- First-degree
- Second-degree
- Third-degree
First-degree discrimination a.k.a. perfect price discrimination
occurs when a company charges the maximum possible price for each unit consumed. Because prices vary among units, the firm captures all available consumer surplus for itself. This type of discrimination is rarely practiced.
Second-degree price discrimination
occurs when a company charges a different price for different quantities consumed, such as quantity discounts on bulk purchases.
