ECON 0100: Monopoly
23 Cards in this Set
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3 sources of barriers to entry(monopoly)
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-monopoly resources
-government regulation
-the production process
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Monopoly resources
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-A key resource required for production that is owned by a single firm
-examples: -utilities
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Government Regulation
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-The government gives a single firm the exclusive right to produce some good or service
Examples: -Patent law.
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Production process
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-A single firm can produce output at a lower cost than most other firms(natural monopoly)
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Natural Monopoly
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-Arises because a single firm can supply a good or service to an entire market at smaller cost than could two or more firms. (economies of scale)
Example: If there is a giant company(mcdonalds) try to get into cookie industry.... could produce for a low cost so no other company can beat …
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Club Good
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-Excludable but not rival in consumption
example:fire production
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Key difference between a competitive firm and a monopoly
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-The monopolies ability to control the price of its output
-competitive firm is small relative to its market, where as the monopoly is the soul producer in its market
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total revenue
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-the quantity sold
-TR=(P)(Q)
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Average Revenue
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-AR=TR/Q
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Marginal Revenue
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MR=change in TR/change in Q
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A monopolists marginal revenue is always...
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-Less than the price of its good.
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The output effect
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-More output is sold so Q is higher which tends to increase total revenue.
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The Price effect
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-The price falls so P is lower which tends to decrease the total revenue
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The monopolist's profit-maximizing quantity of output is determined by...
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-the intersection of the marginal revenue curve and the marginal cost curve
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Monopoly profit equations
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-Profit=TR-TC
-Profit=(TR/Q-TC/Q)xQ
Profit=(P-ATC)xQ
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P-ATC
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-The profit on the typical unit sold.
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In competitive markets, price....
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-equals marginal cost.
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In monopolized markets price...
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-Exceeds marginal cost
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How monopoly results in deadweight loss...
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-A monopolist produces less than the socially sufficient quantity and charges a price above marginal cost
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Price discrimination
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-The business practice of selling the same good at different prices to different customers. (requires a firm to have some market power).
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Perfect Price Discrimination
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-A situation in which the monopolist knows exactly each customers willingness to pay and can charge each customer a different price.
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Examples of price discrimination
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Movie tickets(kids price/sr. price/Adult price)
-Airline Prices(round trip)
-discount coupons
-financial aid
-quantity discounts
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Public Policy toward monopolies
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-Increase competion with anti-trust laws
-regulating the behavior of monopolies
-turning private monopolies into public enterprises
-doing nothing at all
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ECON 0100: Monopoly