36 Cards in this Set
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Monopoly
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is a firm that is the sole seller of a product without close substitutes
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market power, market power
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the key difference between a monopoly firm and a competitive firm is that a monopoly firm has ___________ _______, the ability to influence the market price of the product it sells. A competitive firm has no _____ _______.
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barrier to entry- other firms cannot enter the market
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what is the main cause of monopolies?
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barriers to entry
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these are the sources of __________ __________ __________:
-a single firm owns a key resource-the govt gives a single frim exclusive right to produce good
-natural monopoly: a single firm can produce the entire market Q at a lower cost than could several firms
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natural monopoly
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...
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NO! P DOES NOT = MR
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In monopoly, does P = MR?
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horizontal
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the demand curve for a competitive firm is _____________ at the market price
-the firm can increase Q without lowering P
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slopes downward
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a monopolist is the only seller, so it faces the market demand curve and it _____ ______.
-to sell a larger Q, the firm must reduce P
-thus, MR doesn't = P
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beneath
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on a graph, MR is always ____ demand curve (P)
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MR=MC
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no matter what type of firm maxmizing profti always is where _________ = ________
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output effect
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higher output raises revenue
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price effect
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lower price reduces revenue
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yes
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could MR even be negative if the price effect exceeds the output effect?
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could MR even be negative if the price effect exceeds the output effect?
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for monopolists to find maximizing profit on a graph you find where MR=MC and then see where that points hits the demand curve and that's the price they charge. the highest price consumers are willing to pay for the quantity
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monopolist's profit
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= (P-ATC) *Q
-on a graph draw the rectangle from the profit maximizing point on the demand curve down to where it hits the ATC curve.
or for the loss the rectangle from the profit maximizing point of the demand curve up to where it hits the ATC curve
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NO!
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does a monopoly have an S curve?
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Competitive firm
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what kind of firm is this?
-takes P as given
-has a supply curve (its MC curve) that shows how its Q depends on P
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Monopoly
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what kind of firm is this?
-is a "price-maker", not a "price-taker"
-Q does not depend on P; rather Q and P are jointly determined by MC, MR and the demand curve
-NO SUPPLY CURVE
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the market become competitive because generics appear
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Patents on new drugs give a temporary monopoly to seller, what happens when the patent expires?
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slopes downward
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D curve is flat for individual competitive firms but for monopolies, since the monopoly is the whole market the D curve _____ ______
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P= MC and total surplus is maximized
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in a competitive market equilibrium, P = _____ and total surplus is _____
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P > MR = MC exceeds
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in a monopoly equilibrium, P > ____= ____
the value to buyers of an additional unit (P) _____ the cost of the resources needed to produce that unit of MC.
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increasing competition with antitrust laws
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Public policy toward monopolies:
-ban some anti competitive practice, allow government to break up monopolies
-ex: Sherman antitrust act (1890)
-ex: Clayton act (1914)
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Regulation
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Public policy toward monopolies:
-government agencies set the monopolist's price
-government may require natural monopolies to set P= MC (called marginal cost pricing); however since MC < ATC at all Q, losses would result
-if so, regulators might subsidize the monopolist or set P=AT…
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marginal cost pricing
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a way of regulation:
-government may require natural monopolies to set P= MC; however since MC < ATC at all Q, losses would result
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average cost pricing
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a way of regulation:
- regulators might subsidize the monopolist or set P=ATC for zero economic profit
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public ownership
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Public policy toward monopolies:
_______ _______ is usually less efficient since no profit to motive to minimize cost
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do nothing
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Public policy toward monopolies:
the foregoing polices all have drawbacks, so the best policy may be ____ _____
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Public policy toward monopolies
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-increasing competition with antitrust laws
-regulation
-public ownership
-do nothing
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price discrimination
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- selling the same good at different prices to different buyers
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what characteristic is used in price discrimination?
a firm can increase profi by charging a higher price to buyers with a higher _____
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what characteristic is used in price discrimination?
a firm can increase profi by charging a higher price to buyers with a higher _____
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perfect price discrimination
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the monopolist produced the competitive quantity , but charges each buyer with his or her WTP
-no dead weight loss, the monopolist captures all the CS as profit
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dead weight loss
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if the monopolist charges the same price to all buyers it results in ______ ____ ______
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no! no firm knows every buyers WTP, so firms divide customers into groups based on some observable trait that is likely related to WTP, such as age
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is perfect price discrimination possible in the real world?
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examples of price discrimination
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-these are examples of....
-movie tickets, airline prices, discount coupons, need-based financial aid, quantity discounts
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rare
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in the real world, pure monopoly is __________
-yet many firms have market power, due to:
-selling a unquie variety of a product
-having a large market share and few significant competitors
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EC 110: EXAM 3