Chapter 12 Flashcards
Monopoly (35 cards)
Natural monopoly
A market in which economies of scale enable one firm to supply the entire market at the lowest possible cost (like gas, water, etc.)
Ownership barrier to entry
Competition or entry restricted by a concentration of ownership (like wholesale markets)
Legal monopoly
a market in which competition and entry are restricted by granting of a public franchise, patent or copyright (like Canada Post)
Monopoly pricing
Sets its own price. Therefore, to sell larger quantity, a monopoly must set a lower price.
Two types of pricing strategy
Simple price: a firm must sell each unit of its output for the same price to all its customers
Price discrimination: sells different units of a good or service for different prices.
What does the market demand curve for monopolies look like?
Since monopoly is an oen firm, the demand curve facing the firm is the market demand curve.
Why is marginal revenue (MR) less than the price?
When the price is lowered to sell one more unit, two opposing forces affect total revenue.
What are the two opposing forces that affect total revenue?
The lower price results in a revenue less on the original unit sold and a revenue gain on the additional quantity sold.
How is single-price monopoly revenue related to the elasticity of demand for its goods?
Quantity demanded changes proportionally more than the price change = demand is elastic and (MR is positive), and there is a percent fall in the price, which brings a greater than 1 percent increase in the quantity demanded; quantity demanded changes proportionally less than the price change = demand is inelastic, and the 1 percent fall in price brings a less than 1 percent increase in the quantity demanded (MR is negative); quantity demanded changes exactly proportionally to the price change = demands is unit elastic, and a 1 percent fall in price brings a percent increase in the quantity demanded (MR is zero);
different demands bring what type of gain/loss of revenue (elastic, inelastic, unit elastic)
Demand elastic: A fall im price brings an increase in total revenue, the revenue gain from the increase in quantity outweighs the revenue loss from lower prices.
Demand inelastic: A fall in price brings a decrease in total revenue, the revenue gain from the increase in quantity is outweighed by the revenue price from lower prices
Deman unit elastic: A fall in price does not change total revenue, the revenue gain from the increase in quantity offsets the loss from the lower prices.
Monopoly and profit-maximizing quantity?
Monopoly produces the profit-maximizing quantity and sells that quantity for the highest price it can get.
Regular firms = maximize profit by having MR = MC
Monopoly = Price > MR, therefore, Price > MC
Competitive market supply becomes
Monopoly’s marginal cost (MC) curve
Perfect competition graph
In perfect competition, graphs represent demand, which reveals the MSB, D = MSB, and surplus reveals MSC, S = MSC.
Graph also reveals consumer and producer surplus; consumer surplus is present under the demand curve and above the equilibrium price & producer surplus is above the supply curve and below the equilibrium curve (resources are efficient).
How are output and quantity determined in a monopoly?
In monopoly, quantity (Qm) is produced and output is sold for price (Pm). The smaller the output and higher price drive a wedge between MSB & MSC & creates a deadweight loss (inefficient).
How/why does consumer surplus shrink in a monopolistic market?
Two reasons: 1. consumers lose by having to pay more for a good/serve, 2. consumers lose by getting less good, a this loss is part ofthe deadweight loss.
Does producer surplus shrink?
Monopoly also loses some producer surplus because it produces smaller output, but it does still gain from putting a higher price on the good/service.
It also doesn’t produce at lowest long-run average cost (LRAC) because of zero competition.
How does monopoly damage consumer interest?
Three reasons: 1. monopoly produces less product, 2. increases the cost of production, 3. raises the prices by more than the increased cost of production.
Redistribution surplus
Monopoly takes the difference in higher price (Pm), the comp price (Pc), from the quantity being sold (Qm).
Economic rent
Any surplus- consumer surplus, producer surplus, or economic profit.
Rent seeking
The pursuit of wealth by capturing economic rent.
Types of rent seeking (mention an advantage of rent seeking that the monopoly does not offer and disadvantage of rent seeking)
Two types: 1. Buy a monopoly; a person searches for a monopoly that is for sale at a lower price than the monopoly’s economic profit. Note: time spent to find a monopoly instead of producing goods is part of social cost of monopoly. 2. Create a monopoly; usually occurs through political activity (lobbying). Note: very costly.
No barriers in rent seeking.
The price to achieve the monopoly increases as competition increases, to the point where the buyer does not achieve economic profit from buying the monopoly (zero economic profit).
Price discrimination
Selling a good/service at a number of different prices.
IT increases economic profit.
Note: some prices differ due to product cost, which does not count as price discrimination.
How do firms discriminate against buyers?
Different groups of buyers will have different budgets they are willing to pay. Based on those groups, firms have the incentive to increase or decrease prices based on the groups available to them (like business trips vs leisure trips).
Firms also discriminate in prices based on the quantity a buyer is purchasing (like buy one get one free).
Equation for economic profit, producer surplus, and converted economic profit
Economic profit = TR - TC
firms convert consumer surplus into producer surplus = more economic profit.
Producer surplus = TR - TVC (under the MC curve)
Economic profit = producer surplus - TFC.
Note: anything that increases producer surplus results in economic profit.
