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14 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What is the definition of a monopoly?
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Only supplier of a good for which there is no substitute
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- A monopoly's demand curve is the market demand curve
- It's a price setter |
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How does a monopoly maximise profit?
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By setting marginal revenue equal to marginal cost:
MR (Q) = MC (Q) |
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What is the difference between a monopoly maximising profit compared to a competitive firm?
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A firm's marginal revenue curve depends on its demand curve
A monopoly's marginal revenue curve lies below its demand curve for any positive quantity |
Demand curve shows price, p, it receives for selling a unit at given quantity, Q
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Explain how a monopoly's marginal revenue curve works
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If a monopoly increase output by dQ this lowers the price per unit by dp/dQ, so monopoly loses (dp/dQ) x Q on units originally sold at a higher price.
It still earns an additional price p on extra output |
MR = p + (dp/dQ) x Q < p as (dp/dQ) < 0
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Can a monopoly set both price and quantity?
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No, a monopoly can set price OR quantity
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A monopoly is constrained by its demand curve
Doesn't matter whether a monopoly chooses P or Q |
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Define market power
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Market power gives firms ability to charge a price above marginal cost
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Monopoly sets q(monopoly)
so: MR(qmonopoly) = MC(qmonopoly) and pmonopoly from demand curve: pmonopoly = p(qmonopoly) Since MR lies below the demand curve: - MC(qmonopoly) = MR(qmonopoly) < p(qmonopoly) = pmonopoly - Monopoly has market power pmonopoly >MC(qmonopoly) |
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What might cause market power?
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No close substitutes for firm's product exists
Other firms cannot enter the market Similar firms are located far away |
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What are the welfare effects of a monopoly?
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Welfare (W) = consumer surplus (CS) + producer surplus (PS)
- Welfare is lower under monopoly than under competition - Monopoly sets p > MC, causing deadweight loss (DWL) |
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Why do monopolies exist?
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- Government created monopoly to provide an essential service
- Merger of several firms into one firm - Firms form a cartel - Strategies that discourage other firms from entering the market - One firm has a cost advantage over other firms |
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Why might a firm have a cost advantage that lets it become a monopoly?
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- Firm controls a key input (e.g. natural resource)
- Firm has superior technology - Has a better way of organising production - Market is a natural monopoly |
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What is a natural monopoly?
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A natural monopoly occurs if one firm can produce total market output at lower cost that could several firms
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How could a government regulate a natural monopoly?
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- Regulation to eliminate dead-weight loss
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Regulation is said to be optimal if it leads firm to produce q as a competitive firm
May need to provide a subsidy if p = MC is too low for firm to cover costs |
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Why might a government create barriers to entry?
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- Patents
Patents grant an inventor the right to be a monopoly provider of a good for a number of years. This may stimulate research - Essential servies provision |
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How might s government reduce market power?
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Regulation
Antitrust laws Break up existing monopolies |
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