Monopoly-----> Price Discrimination pg. 43-47

What is a monopoly?

The extreme situation of a single supplier

How do monopolies arise?

There are barriers to entry that prevent competitors from entering the market

What are the most important sources of barriers to entry?

Ownership of a key resource, Government-created monopolies, and natural monopolies

How is the market for residential electrical supply a monopoly?

Because a single company own the retail electricity distribution system

Which diamond company was a monopoly created by the ownership of a key resource?

The DeBeers company

The DeBeers company owned mines responsible for how much of the worlds diamond production?

80%

How are government created monopolies formed?

The government gives the rights to supply a product to a single company

What mechanisms are used to create government made monopolies?

Patent and copyright laws

How many years do patents grant the exclusive right to utilize technologies?

20 years

What do inventors exchange for their patents?

Revealing the details of their innovation

What is a natural monopoly?

An single firm that can supply the market at a lower cost than could two or more firms

How do natural monopolies happen?

When there are large fixed costs hat cause the firms average costs to be falling at a scale of production that can serve the entire market

What are examples of markets prone to natural monopolies?

Railroads, pipelines, and cable television

As price falls what increases?

Demand

The total revenue of a firm is at what point?

The point that is equal to the price times the quantity

Lowering price and increasing supply will do what?

Increase total revenue

By lowering the price and increasing supply what happens to marginal revenue?

It is less than the price of service

What is marginal revenue?

The incremental increase in revenues produced by each product

What is the profit-maximizing strategies for a firm in a competitive market?

Increase supply until marginal cost equals marginal revenue

The profit maximizing strategies for a firm in a competitive market also applies for who?

A monopolist

As long as marginal revenue is larger than marginal cost, increasing supply will do what do economic profits?

It will cause them to increase

Increasing supply beyond the point where marginal revenue is greater than marginal cost will result in what?

Profits to begin to decline

If a company were to charge each customer a price equivalent to the value that customer placed on its service it could avoid what?

The negative effect of expanding sales of the revenue earned frome existing customers

By charging different prices, the demand marginal revenue curve would be identical to what?

The market demand curve

What is price discrimination?

Charging each customer a price equivalent to the value that a customer places of a service, or good

How do cable companies price discriminate?

By offering different packages of channels

How do movies theaters engage in price discrimination?

By offering lower priced tickets for children and senior citizens, consumers that are likely to have a lower willingness to pay

How do airlines engage in price discrimination?

By charging lower prices for travelers who stay over a Saturday night, leisure travelers will accept this condition, yet business travelers who’s willingness to pay is higher, will not

What is an example of how Colleges engage in price discrimination?

Need based financial aid

How does price discrimination further increase monopoly profits?

By allowing the monopoly to capture a greater fraction of the benefits produced by each transaction

What positive effects does price discrimination have?

It increases social welfare

How does price discrimination increase social welfare?

By moving the market closer to the socially efficient quantity