Week 8 Flashcards
What are the characteristics / typical assumptions of a monopoly?
One firm.
The firm sells a unique / differentiated product.
There are high barriers to entry.
Monopolists are “price makers”; they have “market power” to set P>MC
What are the possible causes of barriers in a monopoly market?
Ownership of some key resource.
Economies of scale – costs of production making a single producer more efficient than a large number of consumers – known as a natural monopoly.
Patents or copyright laws.
How can firms grow?
Many firms grow by mergers/acquisitions, although there’s competition policy to restrict this.
What are the differences between monopolies and perfectly competitive firms?
The key difference between a perfectly competitive firm and a monopoly is the price setting power.
Monopolists face a downward-sloping demand curve compared to a horizontal curve for perfectly competitive firms.
Monopolists can make supernormal profits in the long run but PC firms can’t.
For a monopolist, AR doesn’t equal MR unlike PC firms where AR=MR=P.
What’s the profit maximising level of output?
The profit maximising level of output is MR=MC.
What’s the efficiency of a monopoly?
Monopolies may be productively inefficient.
They are allocatively inefficient.
It’s better than PC in terms of dynamic efficiency.
What’s strategic interdependance?
Strategic interdependence is where the outcome of one party depends not only on their own actions but also the expectations of others.
What are the assumptions of monopolistic competition?
A large number of small and insignificant firms.
Product differentiation.
Free entry and exit.
Complete information.
How do monopolistically competitive markets work in the short run?
In the short run, a monopolistically competitive market is rather like a monopoly.
Monopolistically competitive firms face downward sloping demand due to differentiated products.
Firms are profit maximisers and choose to produce where MR = MC.
How do monopolistically competitive markets work in the long run?
As firms can enter the market in response to profits and due to low barriers to entry, the demand (AR) curve for incumbent firms will shift to the left.
If losses are made in the short run, some firms will exit the industry, shifting the demand curve of the remaining firms to the right.
What are the pros of advertising?
Provides information to consumers.
Consumers having more complete information is pro-competitive.
What are the cons of advertising?
Consumers’ tastes may be manipulated.
The extent of differentiation may be exaggerated (misinformation).
What are private goods?
Most goods are private goods, which are excludable and rivalrous.
Excludable: people can’t consume them unless they pay for them.
Rivalrous: one person’s consumption stops another person from consuming the good.
What are public goods?
Public goods are non-excludable and non-rivalrous.
What market failures arise in markets for public goods?
Public goods cannot be provided through a market system and hence we have market failure (goods not being provided at all).
The free rider problem is a form of market failure, stating that people will benefit from a good/service without paying for it.
In presence of a free rider, a private market doesn’t produce an efficient outcome.
What’s a solution to the problem of public goods?
A solution to the problem of public goods is public provision.
What are some forms of micro intervention?
Price controls (price ceilings and floors).
Quantity controls (quotas).
Taxes and subsidies.
What does a binding price ceiling result in?
Lower price and lower quantity.
A decrease in producer surplus.
Deadweight welfare loss.
Consumer surplus gain (depending on elasticities).
What’s a quota?
A quota is a restriction in the quantity of something that can be bought or sold.
What does a binding quota result in?
Higher price and lower quantity.
A decrease in consumer surplus.
Deadweight welfare loss.
Producer surplus gain (depends on elasticities).
What are externalities?
An externality arises when the actions of an individual or firm has unintended consequences on an external third party.
Private costs/benefits are the c/b to the individual (consumer or producer).
Social costs/benefits are wider c/b.
Externalities arise from failure to account for social c/b when making economic decisions.
What are private solutions to externalities?
Property rights – does the producer have the right to pollute or do locals have the right to clean air.
Coase theorem – private parties can solve the problem of externalities by bargaining with each other.
What’s the problem with private solutions to externalities?
There may be issues related to bargaining, asymmetric information and bargaining issues.
What are the public solutions to externalities?
Taxes can be used to correct negative externalities.
Subsidies can be used to correct positive externalities
