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48 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What is a monopoly?
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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.
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local telephone, gas, electricity, water
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A monopoly arises when:
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There are no close substitutes
There are barriers to entry |
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What is a barrier to entry?
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anything that protects a firm from arrival of new competitors.
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What are two types of barrier to entry?
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Natural
Legal |
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What is a natural monopoly?
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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.
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What is a legal monopoly?
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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.
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What is a public franchise?
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an exlucsive right granted to a firm to supply a good or service.
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US postal and mail
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What is a government licence?
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it controls entry into particular occupations, professions, and industries.
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What is a patent?
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an exclusive right granted to the inventor of a product or service
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What is a copywright?
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exclusive right granted to the author or composer of a literary, musical, dramatic, or artistic work.
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What are two price setting possibilities in a monopoly?
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single price
price discrimination |
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What is a single price monopoly?
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a fimr that must sell each unit of its output for the same price to all its customers.
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Debeers diamonds
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Price discriminating monopoly?
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a firm that is able to sell different units of a good or service for different prices.
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Airlines, Pizza
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What is total revenue in monopoly?
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It is the price multiplied by the quantity sold.
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What is marginal revenue in monopoly?
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the change in total revunue resulting from a one-unit increase in the quantity sold.
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What does the total revenue test detm?
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whether the demand is elastic or inelastic.
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In monopoly, when marginal revenue is positive, demand is...
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elastic
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when marginal revenue is zero, demand is..
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unit elastic
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in monopoly, when when marginal revenue is negative, demand is...
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inelastic
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When total revenue is maximized.. marginal revenue is ...
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zero.
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In monopoly, when marginal revenue is zero, total revenue...
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is maximized.
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In monopoly, (as well as perf comp), economic profit is:
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the vertical distance between total revenue minus total cost.
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In monopoly, economic profit is maximized when...
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Marginal cost= marginal revenue
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In monopoly, the price is determined by:
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The demand curve.
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In monopoly, economic profit is located where on the graph?
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Its the blue rectangle stretching from the point on the demand curve straight down to a point on the average total cost curve (atc).
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IN monopoly, the profit-maximizing output is the point where
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marginal revenue equals marginal cost.
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Compared to perfect competition, a single price monopoly produces...
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a smaller output and charges a higher price.
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Is a single price monopoly efficient? Why?
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No, because the Price(m) which equals marginal benefit, exceeds marginal cost. Underproduction creates a deadweight loss. Consumer surplus shrinks and producer surplus expands.
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What is rent seeking?
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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.
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What are two ways a person might become the owner of a monopoly?
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Buy a monopoly
Create a monopoly by rent seeking |
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What is rent seeking?
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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.
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Rent seeking exhausts:
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Economic profit.
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A firms rent seeking costs are:
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fixed costs.
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Rent seeking costs add to:
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total fixed costs and average total cost.
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What is price discrimination:
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selling a good or service at a number of different prices... it is widespread.
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Most price discriminators are not:
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monopolies
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To be able to price discriminate, a firm must:
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Identify and separate different types of buyers
Sell a product that cannot be resold. |
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What two broad ways to firms price discriminate?
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Among groups of buyers
Among units of a good |
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How do firm price discriminate among groups of buyers?
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a firm offers different prices to different types of buyers based on things like age, employment status, or some other easily distinguished characteristic.
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How does a firm price discriminate among units of a good?
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a firm charges the same prices to all its customers but offers a lower price per unit for a larger number of units bought.
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Pizza Hut
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What is perfect price discrimination?
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price discrimination that extracts the entire consumer surplus.
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With perfect price discrimination, a fims demand curve becomes:
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The marginal revenue curve.
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With perfect price discrimination, economic profit:
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is maximized when the lowest price equals marginal cost.
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With perfect price discrimination, the monopoly increases output to the point at which...
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price equals marginal cost. This is efficient.
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The main reasons why a monopoly exists is that it has potential advantages over a competative alternative, these advantages arise from:
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Economies of scale
Incentives to innovate |
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Economies of scale can lead to what kind of monopoly?
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Natural
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What is the marginal cost pricing rule?
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a price rule for natural monopoly that sets price equal to margial cost.
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What is average cost pricing rule
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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.
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