monopoly Flashcards
(31 cards)
price maker
a firm that does not have to consider competitors when setting the prices of its products
monopoly
a firm that is the sole seller of a product without close substitutes
cause of monopoly
barriers to entry
three main sources of barriers to entry
- monopoly resources 2. government regulation 3. the production process
monopoly resources
a single firm owns a key resource. uncommon because economies are large and resources are owned by many people.
government created monopolies
patent and copyright laws, higher prices, higher profits
natural monopolies
a market that runs most efficiently when one large firm supplies all of the output.
average revenue
total revenue divided by the quantity sold. equals the price
marginal revenue
less than its price because ,with a downward demand curve, to increase the amount sold, a monopoly must decrease the price (reducing marginal revenue(.
the output effect
more output is sold, so Q is higher, which tends to increase total revenue.
the price effect
lower price reduces revenue. Effects monopolies but not competitive markets.
monopoly demand curve
demand curve is equal to the average revenue and price
monopoly marginal revenue curve slope
MR slopes downhill faster than monopoly demand but starts at the same point
marginal revenue is negative when…
the price effect on revenue is greater than the output effect.
profit maximizing quantity (monopoly)
MR=MC
price in monopoly
price is based on demand curve at profit maximizing quantity P> MR=MC
monopoly profit
difference between the average total cost at the profit maximizing output and the price (P-ATC)*Q
monopoly deadweight loss
the inefficiency that arises whenever a monopolist charges a price above marginal cost. monopolist produces less than the socially efficient quantity of output.
when is a monopoly’s profit a social cost?
when inefficiency diminishes the total surplus. Increased producer surplus from profit can be okay as long as it isn’t connected to consumers buying fewer units.
price discrimination
the business practice of selling the same good at different prices to different customers. Not possible in a competitive market.
Price discrimination Lesson One
rational strategy for a profit maximizing monopolist
Price Discrimination Lesson Two
market forces can prevent firms from price discriminating (arbitrage)
arbitrage
the process of buying a currency low and selling it high
Price discrimination Lesson Three
price discrimination can raise economic welfare. Increases the producer surplus without changing consumer surplus.
