Untitled Deck Flashcards
(20 cards)
What is a monopoly?
A market structure where there is only one seller of a good or service that has no close substitutes.
What is a monopolist?
The single seller or firm in a monopoly.
What is pure monopoly?
A relatively rare form of monopoly.
What are the main barriers to entry in a monopoly?
- Natural monopoly, economies of scale
- Limited size of the market
- Exclusive ownership of raw materials
- Patents
- Licensing
- Sole rights
- Import restrictions
- Firms can create their own barriers (e.g., predatory pricing, excess capacity)
How does a monopolist control prices?
A monopolist has substantial control of the price but is limited by market demand.
What does the demand curve look like for a monopolist?
It is downward-sloping.
What is the relationship between average revenue (AR) and marginal revenue (MR) in a monopoly?
MR is always lower than AR when the firm’s demand curve slopes downward.
What does the total revenue curve (TR) indicate when MR is positive, zero, or negative?
- MR positive: TR increases
- MR zero: TR remains unchanged
- MR negative: TR falls
What is the equilibrium position of a monopolist?
The monopolist maximizes profit by producing at a quantity where MR equals long-run MC.
What is the short-run equilibrium for a monopolistic firm?
The firm produces a quantity Q1 at a price P1, maximizing profit.
What is the economic profit for a monopolist per unit of output?
The difference between M1 and K1 (or between P1 and C1).
What is price discrimination?
The practice of selling different units of a good or service for different prices or charging different prices to different customers.
What are the two basic conditions for price discrimination?
- The firm must be a price maker or price setter.
- Consumers or markets must be independent.
What are the three main varieties of price discrimination?
- First-degree price discrimination
- Second-degree price discrimination
- Third-degree price discrimination
What is a natural monopoly?
A situation where it is most cost-efficient for a single firm to produce all the output in an industry.
What happens if a monopoly is unregulated?
Equilibrium will be at price P1 and quantity Q1, allowing the monopolist to charge any price and make large profits.
What is marginal cost pricing?
A strategy that yields a price P3 and quantity Q3 but may result in losses for the monopolist.
What is average cost pricing?
A pricing strategy that yields a price P2 and quantity Q2, allowing the firm to earn a normal profit but resulting in inefficient output.
What interventions might be necessary in a monopoly?
- Price control
- Government can supply the good or service and use tax revenue to compensate for losses
- Government can subsidize a private firm’s losses
- Alternative pricing strategies
- Price discrimination
True or False: A monopolist has a supply curve showing quantities supplied at different prices.
False
