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79 Cards in this Set

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Monopoly
opposite end of the spectrum from perfect competition
Assumptions (monopoly)
1. One firm
2. high barriers to entry
3. Differentiated product
4. Price-chooser
Why does a monopolist have market power?
it controls the market and there are high barriers to entry (a monopoly firm is the market)
Types of monopoly
Natural Monopoly
Legal monopoly
illegal monopoly
Natural monopoly
-economic barriers to entry
-decreasing cost industry
why is it hard for other firms to enter a natural monopoly?
the firm have so low a per-unit cost. (generally occurs with high fixed costs and low variable costs ex: utilities)
Legal monopoly
-granted by the government (comp is prohibited by law)
-most common type of monopoly ex: cable patents, copyrights
illegal monopoly
-sense of collusion
-predatory practices
-strategic control
Demand Curve
since the monopoly is the only firm in the market, they can decide where they want to produce based on the price/quantity tradeoff and show a downward sloping demand curve.
Marginal Revenue Curve
with a monopoly, price doesnt equal marginal revenue because the firm cant sell the additional units at a lower price, they must sell all previous unites at that lower price
prefectly elastic demand curve

(like perfect competition)
MR=P[1-E^d]
imperfective competitive structure
more inelastic demand curve, MR<P[1-E^d]
Supply/Cost Curves
all cost curves in a monopoly are the same as in perfect competition based on the same assumptions.
supply/cost curve assumptions
1. specialization of labor
2.law of diminishing marginal product
3.elastic labor supply
+Profit
P>ATC
0 Profit
P=ATC
-Profit
P<ATC
Where do we get price?
from the demand curve
Where do we find max quantity?
MR=MC
What does the government do when they see dead weight loss (inefficiency)?
impart regulations to increase societal efficiency
Name types of government regulations.
1. Average Cost pricing
2. Marginal Cost pricing
3. Price discrimination
4. naturalization
Average Cost Pricing
"Fair Rage of Return Regulation" government says P should equal ATC to eliminate excess profit. By pricing at ATC, the firm should be able to cover all opportunity costs and remain economically viable. When this occurs, DWL is reduced but not always eliminated.
Marginal Cost Pricing
Government says P should equal MC in perfect competition. A problem arises when a firm makes a loss and thus can be run out of business.
Price Discrimination
This is the ability to charge different prices to different people based on their private value for the product. It only works if the firm can seperate the markets for its product and there are different elasticity's in the different markets.
What is the problem with the price discrimination model?
arbitrage (buying on market and selling in another to make money) but can be solved with market sealing (keeping people from being able to sell the good in another market)
Inefficiencies of Monopolies
The most efficient market is one in which ->P=MC (perfect competition) because social welfare is maximised and there is no DWL (dead weight loss)

-> Monopolists restrict Q in order to increase P, therefore increasing excess profits. This causes P>MC which is inefficient because now the value of the good to society is greater than the value of the inputs used to make the good. But the monopolist wont produce more.
Social Welfare
the benefit society faces, gains, losses because of the level of production and pricing, goal is to maximize W (W=CS+PS)
Consumer Surplus
the value you hold in a product over what you actually pay
Producer Surplus
the difference between what the producers get paid for the good and the resource cost of production
Dead Weight Loss
the area that no one gets... when quantity is restricted to make P>MC we have a loss
If DWL occurs, the market is _________
inefficient
DWL is NEVER efficient
Naturalization
Government says firms should operate at P=MC. However here, if a firm makes a loss the government will use tax revenues to subsidize losses in firms whose P<ATC. The problem here comes when the government could potentially run the operation as monopolist and use it to make money.
Oligopoly Assumptions
1. Few buyers, few sellers, all have relationship
2. Specialized product that is somewhat homogenous
3. Loyalty is built
4. Rivals have different cost structures
5. Stable P and Q
Price Leadership
With oligopolies there are a few large firms and significant barriers to entry. Generally, one of the few firms is bigger and will take the lead and all the other firms will follow its lead. If it increase in price successfully, so will the other firms. If it decrease its price, they will too. Essentially, the leader must determine at what high, profit-making level to price.
Monopolistic Competition Assumptions
1. Many buyers and sellers
2. Differentiated product
3. Low barriers to entry
4. non-price competition
As with perfect competition and monopoly, firms can make a ______
profit
Inefficiencies of Monopolistic Competition
Quantity is reduced to where P>MC thus meaning there is a DWL (inefficient), however the government will not regulate because there is a variety of choice with monopolistic competition.
-> perfect competition- all the same product
-> monopoly--one product
-> monopolistic competition- differentiated product
Firms are independent in:
an oligopolistic industry
In a monopolistically competitive market
firms produce differentiated products
Advertising
increases the average total cost of producing a given amount of output
The price a monopolist sets is equal to
average revenue
A monopoly firm selling textbooks to students in a small town currently maximizing profits by charging a price of $50 per book. It follows that the marginal cost of textbooks is:
less than $50
The deadweight loss from monopoly exists because:
the marginal benefit of the monopolists product to society exceeds the marginal cost
The demand curve for a monopolist differs from the demand curve faced by a competitive firm because the demand curve for:
a monopolist is the market demand curve
Marginal revenue is not equal to price for a monopolist because:
the monopolist must lower the price of all units in order to sell more.
Long-run competitive equilibrium in an industry implies that no firm
has an incentive to enter or exit the industry
The marginal rate of substitution is the rate at which
inputs must be substituted for one another in order to keep output constant
The principle of diminishing marginal utility says that marginal utility
falls after some point
Total producer surplus is measured as the area
between the supply curve and the market price
Price elasticity of demand is the
change in the quantity of a good demanded divided by the change in the price of that good.
A surplus of a good could possibly be eliminated by
the removal of a price floor
The law of demand states that the quantity demanded of a good is inversely related to the price of that good. Therefore, as the price of a good goes:
up, the quantity demanded goes down
When you produce cars, it is enormously expensive to produce one car, but then the costs per car decrease as more are produced. This would be an example of:
decreasing marginal oppurtunity costs
For a given benefit a rational person chooses the option that has:
the lowest oppurtunity cost
if a market with monopolistic competition became a monopoly market, output would
fall
Marginal revenus is equal to
the change in total revenue associated with a change in quantity
In the long run
all inputs are variable
In the long-run equilibrium for a monopolistically competitive firm price
exceeds marginal cost
A monopolistic competitive industry has
differentiated products and easy entry of new firms
the kinked demand curve model concludes that there will be
a gap in the marginal revenue curve
Natural monopoly exists when on firm can supply the entire output demanded at
lower cost than two or more firms
in a competitive market, price is determined by
market supply and demand
The _______ is equal to the horizontal sum of all the firms marginal cost curves above their shutdown points
market supply curve
the social cost of monopoly refers to the fact that
there is a loss in consumer surplus and producer surplus when a monopolist raises price and restricts output
normal profits are
returns to the owners of business for the oppurtunity cost of their implicit inputs
in long run equilibrium, a monopolistically competitive firm
makes only normal profit
the long-run average total cost of production
is considered to be an envelope curve because each short-run average total cost curve touches it at only one level of output.
A monopolistically competitive firm will produce where:
marginal revenue is equal to marginal cost
there is no incenitive for firms to enter or leave an industry when
firms are earning zero economic profit
The law of demand states that
consumers buy less of a good when its price increases, proveded all shift factors of deamnd are
According to the law of supply, and increase in the _____ of a product results in an increase in quantity supplied, all other things constant
opportunity cost
All of the following are true about monopoly except
a monopoly will set price equal to minimum possible average cost in the long run
The purpose of advertising is to make the demand for one's product
more inelastic
the price a monopolist charges for its product is
above marginal revenue
the marginal cost curve is a mirror image of
the marginal product curve
adjustments to the long-run equilibrium in perfect competition occurs through
easy entry and exit of firms
a movie theater is a price discriminating monopolist and charges a higher ticket price for late evening showings. Which of the following statements is more likely true?
late-evening moviegoers have more inelastic demands than daytime or early evening moviegoers.
Oligopoly is characterized by all of the following except
easy entry and exit
duality
one to one mapping of cost curves and production curves. when you find the max of MPL you have also found the minimum of the MC