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48 Cards in this Set

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What is a monopoly?
a market with a single supplier of a good or service that has no close substitutes and in which natural or legal barriers to entry prevent competition.
local telephone, gas, electricity, water
A monopoly arises when:
There are no close substitutes
There are barriers to entry
What is a barrier to entry?
anything that protects a firm from arrival of new competitors.
What are two types of barrier to entry?
Natural
Legal
What is a natural monopoly?
when the technology for producing a good or service enables one firm to meet the entire market demand at a lower price than two or more firms could.
What is a legal monopoly?
a market in which competition and entry are restricted by the concentration of ownership of a natural resource or by the granting of a public franchise, goverment licence, patent, or copywright.
What is a public franchise?
an exlucsive right granted to a firm to supply a good or service.
US postal and mail
What is a government licence?
it controls entry into particular occupations, professions, and industries.
What is a patent?
an exclusive right granted to the inventor of a product or service
What is a copywright?
exclusive right granted to the author or composer of a literary, musical, dramatic, or artistic work.
What are two price setting possibilities in a monopoly?
single price
price discrimination
What is a single price monopoly?
a fimr that must sell each unit of its output for the same price to all its customers.
Debeers diamonds
Price discriminating monopoly?
a firm that is able to sell different units of a good or service for different prices.
Airlines, Pizza
What is total revenue in monopoly?
It is the price multiplied by the quantity sold.
What is marginal revenue in monopoly?
the change in total revunue resulting from a one-unit increase in the quantity sold.
What does the total revenue test detm?
whether the demand is elastic or inelastic.
In monopoly, when marginal revenue is positive, demand is...
elastic
when marginal revenue is zero, demand is..
unit elastic
in monopoly, when when marginal revenue is negative, demand is...
inelastic
When total revenue is maximized.. marginal revenue is ...
zero.
In monopoly, when marginal revenue is zero, total revenue...
is maximized.
In monopoly, (as well as perf comp), economic profit is:
the vertical distance between total revenue minus total cost.
In monopoly, economic profit is maximized when...
Marginal cost= marginal revenue
In monopoly, the price is determined by:
The demand curve.
In monopoly, economic profit is located where on the graph?
Its the blue rectangle stretching from the point on the demand curve straight down to a point on the average total cost curve (atc).
IN monopoly, the profit-maximizing output is the point where
marginal revenue equals marginal cost.
Compared to perfect competition, a single price monopoly produces...
a smaller output and charges a higher price.
Is a single price monopoly efficient? Why?
No, because the Price(m) which equals marginal benefit, exceeds marginal cost. Underproduction creates a deadweight loss. Consumer surplus shrinks and producer surplus expands.
What is rent seeking?
the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus away from others. This most of the time creates a monopoly b/c it restricts competition, but not always.
What are two ways a person might become the owner of a monopoly?
Buy a monopoly
Create a monopoly by rent seeking
What is rent seeking?
the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus away from others. This most of the time creates a monopoly b/c it restricts competition, but not always.
Rent seeking exhausts:
Economic profit.
A firms rent seeking costs are:
fixed costs.
Rent seeking costs add to:
total fixed costs and average total cost.
What is price discrimination:
selling a good or service at a number of different prices... it is widespread.
Most price discriminators are not:
monopolies
To be able to price discriminate, a firm must:
Identify and separate different types of buyers
Sell a product that cannot be resold.
What two broad ways to firms price discriminate?
Among groups of buyers
Among units of a good
How do firm price discriminate among groups of buyers?
a firm offers different prices to different types of buyers based on things like age, employment status, or some other easily distinguished characteristic.
How does a firm price discriminate among units of a good?
a firm charges the same prices to all its customers but offers a lower price per unit for a larger number of units bought.
Pizza Hut
What is perfect price discrimination?
price discrimination that extracts the entire consumer surplus.
With perfect price discrimination, a fims demand curve becomes:
The marginal revenue curve.
With perfect price discrimination, economic profit:
is maximized when the lowest price equals marginal cost.
With perfect price discrimination, the monopoly increases output to the point at which...
price equals marginal cost. This is efficient.
The main reasons why a monopoly exists is that it has potential advantages over a competative alternative, these advantages arise from:
Economies of scale
Incentives to innovate
Economies of scale can lead to what kind of monopoly?
Natural
What is the marginal cost pricing rule?
a price rule for natural monopoly that sets price equal to margial cost.
What is average cost pricing rule
a price rule for a natural monopoly that sets the price equal to the average cost and enables the firm to cover its costs and earn a normal profit.