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Chapter 13
Micro-Monopoly
| Term | Definition |
|---|---|
| 4 principal models of market structure: | 1. Perfect Competition 2. Monopoly 3.Oligopoly 4.Monopolistic Competition |
| Monopolist | A firm that is the only producer of a good with no close substitutes (known as monopoly)/reduces the quantity supplied to Qm and moves up the demand curve from C to M raising the price to Pm (slide 6)/barriers to entry are essential for monopolies |
| Market Power | ability of a firm to raise prices |
| Barriers to entry(essential for monopolies) | -control of natural resources or inputs -increasing returns to scale -technological superiority -government-made barriers, including patents and copyrights |
| A natural monopoly exists when increasing returns to scale (economies of scale) provide...... | a large cost advantage to a single firm |
| Network externality | the value of a good or service to an individual increasing as more others use the same good or service |
| Patent | Gives an inventor a temporary monopoly in the use or sale of an invention |
| Copyright | gives creator of a literary or artistic work sole rights to profit from that work |
| MR= | MR= change in TR/ change in Q |
| MR is below the demand curve........... | an increase in production by a monopolist has two opposing effects on revenue: quantity effect and price effect |
| Quantity effect | one more unit is sold increasing total revenue by the price at which the unit is sold |
| Price effect | To sell the last unit the monopolist must cut the market price on all units sold-this decreases total revenue |
| 2 Steps of Profit Maximization | 1. Choosing a quantity: Choose Q where MR=MC 2. Choosing a price: Once you've picked your quantity, follow the graph to the demand curve, which shows you how much consumers will pay(choose highest price you can get away with) |
| Monopolists don't have supply curves BC | they control prices there is no set relationship between price and quantity supplied |
| When a monopoly raises prices and lowers Q, consumer surplus ____ and __________ is created | falls; deadweight loss |
| Antitrust policy | government policies used to prevent or eliminate monopolies (to avoid deadweight loss antitrust policies are created) |
| How to deal with natural monopolies | -Public (government) ownership: publicly owned companies are often poorly run -price regulation: a price ceiling imposed on a monopolist does not create shortages if it is not set too low |
| If the monopoly's price is regulated at PR (slide 38), consumer surplus ______ and profit _______ | rises; falls |
| Deregulation | (away from government-regulated rates) become popular as a way to increase competition and reduce electricity prices |
| Large up-front fixed costs | deterred many would-be new generators |
| Incumbent firms could now manipulate the market | plants were shut down during peak demand hours to raise prices |
| Single-price monopolist | offers its product to all consumers at the same price |
| Price discrimination | they charge different prices to different consumers for the same good/ no deadweight loss bc all mutually beneficial transactions are exploited/zero consumer surplus: entire surplus is captured by the monopolist in the form of profit |
| Common techniques for price discrimination | -Advance purchase restrictions -Volume discounts -Two-part tariffs |
| Suppose that a monopolist can sell 5 units of output at a price of $5 for 6 units of output at a price of $4. What is the marginal revenue of the sixth unit? | -$1 |
Created by:
kthomas96
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