ch 9- econ monopoly

What is a monopoly?

A market served by a single seller of a product with no close substitutes.

What is the formula for Total Revenue (TR)?

TR = P x Q, where P is price and Q is quantity.

How does a monopolist determine price?

can set the price by choosing the quantity supplied.

What is Marginal Revenue (MR) in a monopoly?

change in total revenue from selling one more unit, and it is less than the price due to the downward-sloping demand curve.

What is the relationship between Marginal Revenue and price for a monopolist?

For a monopolist, MR is always less than the price (P) because to sell additional units, the price must be lowered.

What is the profit-maximizing condition for monopolists?

by producing where Marginal Revenue (MR) equals Marginal Cost (MC).

What happens to total revenue when price decreases in the elastic portion of demand?

increases when price decreases in the elastic portion of demand.

What is a natural monopoly?

An industry where market output is produced at the lowest cost when a single firm produces it, characterized by a declining long-run average cost curve.

What are the sources of market power for a firm?

include control of essential facilities, superior technology, government-created monopolies, and patents.

What is the effect of advertising on demand?

Successful advertising campaigns can shift the market demand curve by changing consumer tastes or informing them about new products.

What is the decision rule for advertising?

if the benefit from increased demand exceeds the cost of advertising.

What are network externalities?

A situation where a good's demand increases as more people use it, creating a positive feedback loop.

What is a two-sided market?

A platform where two or more user groups provide each other with network externalities, such as online matchmakers or innovation platforms.

What is the Price/Marginal Cost ratio in monopoly?

It measures the firm's market power; a higher ratio indicates greater market power.

What is the elasticity of demand in relation to market power?

The more inelastic the demand, the greater the market power a firm has.

How can monopolists respond to a shift in the demand curve?

Monopolists can adjust their prices and output levels, but they do not have a traditional supply curve.

What are the pros of advertising?

Advertising can provide useful information about new products and foster competition by informing consumers.

What are the cons of advertising?

Advertising can be wasteful, manipulate consumer tastes, and create entry barriers for new firms.

What is the role of patents in monopolies?

grant exclusive rights to sell a new product for a fixed period, encouraging innovation but also creating monopolies.

What is the impact of superior technology on monopoly power?

can produce at lower costs, enhancing their market power.

What is the long-run equilibrium in perfect competition?

economic profit is zero, and price equals marginal cost.

What is the significance of the demand curve's elasticity over time?

tends to become more elastic over time as better substitutes and more firms enter the market.

What is the relationship between advertising and product quality perception?

High advertising spending can signal high product quality to consumers, influencing their purchasing decisions.

What is the effect of a monopolist lowering prices?

may lead to a decrease in total revenue if it is in the inelastic portion of demand.