Week 7 - Monopoly Flashcards
Perfect competition
A market that has:
- Many buyers and sellers, no one of which is large relative to the overall market.
- Sellers outputs being homogenous.
- Perfect information.
- Firms are price takers
- No barriers to entry or exit.
Imperfect competition
A market where:
- Sellers products can be differentiated.
- Many firms are price setters to some degree.
- Firms have market power - can change prices without losing all sales.
Types of imperfect competition
Pure monopoly: a single firm is the only seller of a unique product.
Oligopoly: A small amount of firms sell a given product.
Monopolistic competition: Lots of firms sell the same product with slight differentiations.
Monopoly
Many buyers, no one of which is large relative to the overall market.
One seller.
No close substitutes.
Perfect information.
Barriers to entry exist.
Total revenue
Average revenue * units sold (q)
TR = aq - bq²
Average revenue
Total revenue / units sold (q). It is equal to the demand curve formula.
AR = a - bq
Marginal revenue
Revenue gained by selling one more product.
Found by differentiating total revenue with respect to units sold.
MC = a - 2bq
Total cost
TC = aq³ - bq² + cq + d
Average cost
Total cost / units sold (q)
AC =aq² - bq² + cq + d/q
Marginal cost
Differential of total cost with respect to units sold (q)
MC = 3aq² - 2bq + c
Marginal cost always crosses the minimum of average cost.
Where is profit maximised?
Where TR>TC and the vertical difference between TR and TC is greatest.
Or when marginal revenue = marginal cost.
How do you find maximum profit
Find optimal output level from the point where MR = MC to get Q*
Use demand curve to find the price at Q* - P*
Total revenue = Q* × P*
Find total cost by finding the point where Q* cross average cost.
Average cost at Q* × Q* = total cost.
Profit = Total revenue - total cost.
Consumer surplus
The difference between how much a consumer is willing to pay for a product and the price they actually pay.
Producer surplus
The profit a seller gets from selling a product.
Why is monopoly inefficient?
It has less total surplus compared to a perfectly competitive market.
What is price discrimination
Different customers are charged different prices for the same good
Conditions for price discrimination
Firm must be a price maker.
Firm must be able to tell which customer is which.
Consumers buying for low prices cannot resell to consumers that would’ve paid higher prices.
First degree price discrimination (perfect price discrimination)
Monopolist knows exactly the willingness of each consumer in the market so they sell each unit of output at a price just equal to each buyers’ maximum willingness to pay for that unit.
Second degree price discrimination
The monopolist knows that its customers have different willingness to pay but cannot tell who is who.
The same price schedule is offered to all buyers but they sort themselves through self-selection.
Third degree price discrimination
The monopolist sees an observable characteristic (e.g., age, gender, race etc.) of its customers that is related to their willingness to pay.
The monopoly then charges different prices based on these characteristics.
