Chapter 8 Flashcards
(17 cards)
Pure Monopoly characteristics
- Single seller - Industry and firm are synonymous
- Unique product - no close substitutes
- Price maker - control over quantity supplied
- Blocked entry
- Non-price competition
*Non-price competition: Standardised product = public relations edvertising. Differentiated product = advertise product’s attributes
Examples of Monopolies
Near-monopolies: A firm has the bulk of sales in a specific market
Regulated monopolies: Government-owned or government regulated public utilities (Eskom)
Assumptions when analysing Monopoly Demand
- Patents, economies of scale or resource ownership secure the monopolist’s status
- No government regulation
- Firm is a single-price monopolist; same price for all units of output
Demand curve characteristics
Pure Monopoly
- Demand curve = market demand curve; only a single demand curve is needed
- Downward sloping - is the industry
- Quantity demanded increases as price decreases
Marginal revenue and price
Demand curve characteristics
A pure monopolist can increase sales only by charging a lower price;
Marginal revenue is less than price
All cutomers must pay the same (reduced) price; results in loss
price = average revenue
MR curve lies below the demand curve
Marginal revenue and Total revenue
Relationship
- When TR is increasing; MR = positive
- When TR reaches maximum; MR = 0
- When TR is diminishing; MR = negative
Because marginal revenue is the change in total revenue
Never choose a price-quantity combination where price reductions cause TR to decrease
MR = MC Rule
A firm will maximise profit/(minimise loss) by producing the output at which Marginal Revenue = Marginal Cost
Provided P => AVC
Profit Maximisation
Pure Monopoly
TR = Q x (P - ATC)
Profit Maximising Output x (PM Price - Average Total Cost) = TR
Monopoly Supply Curve
- A pure monopolist maximizes profit by equating marginal revenue (MR) and marginal cost (MC), not price and marginal cost (MR is less than P for a monopolist).
- Because the monopolist sets output where MR = MC and does not equate price to marginal cost, different demand conditions can result in the same output being sold at different prices.
- Since there is no unique price associated with each possible output level for a monopolist, there is no supply curve.
Price Discrimination
Selling a specific product at more than one price when the price differences are not justifiable by cost differences
The selling of a product to different buyers at different prices
Forms of Price Discrimination
- Charging each customer in a single market the maximum price they are willing to pay
- Charging each customer one price for the first set of units purchased and a lower price for subsequent units.
- Charging some customers one price and other customers another price
Conditions of Price Discrimination
Monopoly Power
* ability to control output & price
Market Segregation
* be able to segregate buyers into classes based on their willingness & ability to pay - price elasticities of demand
No Resale
Economic Effects of Monopoly Vs Pure Competition
- Output is lower and price is higher than in a purely competitive industry. P exceeds MC
- Monopoly price exceeds minimum average total cost. P exceeds minimum ATC
- The sum of consumer surplus and producer surplus is not maximised; Efficiency loss
Monopoly yields neither productive nor allocative efficiency
Regulated Monopolies
Government-owned or government regulated public utilities; subject to rate regulation (price regulation)
Socially Optimal Price
P = MC
The regulated price that achieves allocative efficiency
Determined by the intersection of the Demand Curve and the MC Curve
Fair-Return Price
P = ATC
A regulated price that allows monopolists to break even - earn a normal profit
Determined by the intersection of the Demand Curve and the ATC Curve
Dilemma of Regulation
- At the Socially Optimal Price (P = MC) the monopolist is likely to incur losses and would require government subsidies to survive.
- The Fair-Return Price (P = ATC) only partially resolves the under-allocation of resources
Despite this, regulation can improve outcomes from a social perspective by reducing price, increasing output, and decreasing economic profit.
