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Final Exam Study Guide (11 pages)

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Final Exam Study Guide


This is the final study guide

Study Guide
The University of Oklahoma
Econ 1123 - Princ. of Econ-Micro

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Final Exam Study Guide Lectures: 18 – 24 NOTE: This final is cumulative, so this study guide is to be used with study guides 1 and 2 for the full study guide. Tip: The book is a really good place to find the definitions for the define and explain portions. Lecture 18 (March 6) Concepts covered: I. Monopoly Inefficiency When a monopoly is inefficient, the demand schedule and marginal revenue schedule will not meet at the same place on the upward sloping marginal cost graph. Sometimes this causes deadweight loss: The loss of consumer and producer surplus because some transactions are not undertaken Note: monopolies are more inefficient because they are protected from competition, so they have weaker incentives to minimize costs. Monopolists could devote all economic profits to rent seeking and still earn normal accounting profits. Price Discrimination- Pre- supposes some degree of “market power” (or monopoly power, i.e., some control over the price charged (unlike pure competition who are price “takers” Generally, charging different consumer groups different prices for the same product or service Requirements for price discrimination: -Sellers must have some “market” or “monopoly” power -Sellers must be able to separate consumers based on their elasticities of demand -Sellers (with market power) must be able to prevent arbitrage (prevent low price buyers from reselling to high price buyers) II. Monopoly Characteristics Revisited Sources of monopoly power: Monopoly Inefficiency Rent seeking: x-inefficiency Price D Regulating a Natural Monopoly Anti- Trust Policy *In monopoly there is one seller with no close substitutes and significant barriers to entry Econ 1123 1st Edition Source of monopoly power: economies of scale: decreasing average costs over a large range out output Examples of Natural Monopolies- (intel, local newspapers, electrical utilities) Definitions: Rent Seeking- behavior directed toward avoiding competition, resources expended to protect a monopoly position (lobbying, licensing requirements) Lecture 19 (March 8) Concepts covered: Price Discrimination- charging different customers different prices for the same product Three types of price discrimination: 1. First degree (perfect) price discrimination- charging each customer the maximum priced each is willing to pay. They will do this until the demand meets the ATC schedule because if they do that past that point on the demand schedule they will incur loss. 2. Second degree Price discrimination- Charging different customers based on the quantities purchased. This is called “tiered pricing” 3. Third degree price discrimination- charging different groups of customers different prices. (example: airlines will charge business people more than vacationers because business people have more inelastic demand that says that they really need to be somewhere. I. Regulating the Natural Monopolist Natural monopoly = large economies of scale (declining ATC) mean the efficient scale of operations is roughly equal to market demand (electrical company, water company) Marginal Cost pricing rule- Regulations force the natural monopoly (public utility) to charge a price that equals marginal cost Average Cost Pricing- Regulators require the natural monopoly to charge a price = to average total costs At Price of average total costs the utility ...

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