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Chapter 13


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