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Economics 202 Ch 22
Principles of Economics Ch 22
| Question | Answer |
|---|---|
| Monopoly | A firm that is the lone seller of a product with no substitutes. |
| Barriers to Entry | Factors that block the entry of new firms into a market. |
| Barriers to entry are classified into three general types: | Legal barriers, economies of scale, and exclusive ownership of an essential resource. |
| Legal Barriers | Barriers created by government action. |
| Legal Barriers include: | Public franchise, patent, copyright, license, and trade restrictions. |
| Patent | A government granted monopoly on the production and scale of an invention granted to the inventor. |
| Public Franchise | The government grants one firm an exclusive right to provide a good or a service to a market. |
| Copyright | A government granted monopoly on the production and scale of a creative work granted to the creator. |
| License | A permit issued by the government authorizing a person to conduct a certain type of business. |
| Trade Restrictions | Government imposed limitations on international trade. Tariffs and quotas are often imposed on imports. |
| Economies of Scale | Exist when, as the scale of production is increased, average costs of production decreases. Usually occur when fixed costs are very great. |
| Natural Monopoly | An industry in which economies of scale are so important that only one firm can survive. |
| A monopoly faces the market demand curve and the slope will be: | Downward sloping. |
| Market Power | The ability to affect market price. |
| A monopoly has maximum: | Market power. A monopoly can sell a greater quantity at a lower price, or a lesser quantity at a higher price. |
| Since a monopoly must generally lower the price of all units sold in order to sell a greater quantity: | The marginal revenue of each additional unit sold will be less the unit's price. Thus, the marginal revenue curve will not be the same as the demand curve. |
| Profit-Maximization Rule | Produce the quantity of output where marginal revenue equals marginal cost. |
| Monopoly results in an economically inefficient quantity of output. Monopoly is inefficient because: | It results in a quantity of output where price exceeds marginal cost, and thus where marginal social benefit exceeds marginal social costs. |
| The deadweight loss of monopoly is: | The area between the demand curve and the marginal cost curve for the amount of underproduction. |
| Rent Seeking | When people use resources to manipulate public policy in order to redistribute income themselves from others. |
| Forms of rent seeking include: | Lobbying, campaign contributions, and public relations efforts. |
| Compared to more competitive firms, monopoly producers also tend to be: | Less responsive to consumer demand and less diligent to minimize costs of production. |
| Price Discrimination | Occurs when a seller charges different prices to different buyers for the same good. |
| A firm may practice price discrimination by: | Making coupons and discounts available that more cost-conscious buyers will use, and that buyers willing to pay a higher price will not. Negotiating, beginning at a higher price and working down to a lower price. |
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