econ ch 16/17 - Monopoly and Monopolistic Competition

monopoly

only one seller without close substitutes

monopoly resources

a single firm owns a key resource required for production

government regulations

government only gives one firm exclusive right to produce a good

natural monopoly

a single firm can produce the entire market Q at a lower cost than could several firms

competitive firm

price taker, faces individual demand at perfectly elastic demand,

monopoly firm

price maker, market power, faces the entire market demand, Q doesn’t depend on P

profit max for a monopoly

produce Q where MR = MC

market EQ

at P = MC

monopoly EQ

at p is greater than mr = mc, resulting in DWL

price discrimination

selling same goods at different prices to different buyers, can raise economic welfare

perfect price discrimination

charge each customer at exact WTP, monopoly gets the entire surplus, no DWL, not possible in real world

pure monopoly

many firms have market power due to selling unique product or having large market share and few sig competitors, rare in the real world

public policy toward monopolies

1. increasing competition with antitrust laws

2. regulation

3. public ownership - a gov unit can run the monopoly itself

4. above all, do no harm

monopoly revenue

at MR is less than P, to sell more they must lower the price

increasing q has two effects on revenue:

output effect - output raises revenue

price effect - price decrease reduces revenue

4 types of market structure

perfect competition, monopoly, oligopoly, monopolistic competition

monopolistic competition

many firms sell similar but not identical products

concentration ratio

measure of markets domination by a small nbunber of firms, percent of total output in markets supplied bu 4 larges firms, less than 50% for most industries

monopolistic competition characteristics

numerous firms competing over customers, product differentiation, free entry and exit

short run EQ

profit max in the short run for a monopolistically competitive firm, downward sloping d firm, q @ mr = mc, at each q mr < p

oligopoly

market structure with few sellers offering a similar/identical product

game theory

study of how people behave in strategic situations

oligopolists

make most profit when the cooperate together and act like one big monopolist

duopoly

market with only two sellers, simplest form of oligopoly

collusion

agreement among prism in market about quantities to produce of prices to change

cartel

illegal, group of firms acting in unison

nash equillibrium

economic actors interacting with each other, each choose best strategy given strategies of others

derived demand

demand for a factor of production is service from its decision to supply a good in another market

marginal product of labor

MPL = Q/L

value of MPL

helps convert mpl to dollars, VMPL = P x MPL

neoclassical theory of income distribution

factor prices determined by supply and demand, each factor paid to the value of its marginal product, used by most economists as a starting point

monopsony

a market with only one buyer

non-compete clauses

bar employees from leaving to work for a competitor

efficiency wages

above EQ wages paid by firms to increase worker productivity

quintile ratio

income share of the highest ratio divided by income share of the lowest quintile

poverty rate

percent of the pop whose family income falls below an absolute level

poverty line

set by federal government, adjusted yearly, depends on family size

the economic lifecycle

regular patterns of income variation over a persons life

transitory income

need not affect standard of living

permanent income

persons normal income

economic mobility

movement of people across income classes

utility

measure of happiness or satisfaction

utilitarianism

gov should choose policies to maximize total utility of everyone in society

diminishing marginal utility

as a persons income rises the extra well being derived from an additional dollar of income falls

liberal contractarianism

gov should choose policies deemed as just, as evaluated by impartial observers

libertarianism

gov should punish crime and enforce voluntary agreements but not redistribute income

budget constraint

limit of consumption bundles a consumer can afford

indifference curve

shows consumption bundles that give the consumer the same level of satisfaction

MRS - marginal rate of substitution

rate at which a consumer is willing to trade 1 good for another along an indifference curve

four properties of indifference curves

1. higher curve usually preferred to lower

2. slope downward

3. do not cross

4. bowed inwards

extreme examples of indifference curves

shape of curve - reveals customers willingness to trade one good for another

perfect substitutes - 2 goods with straight line indifference curves, constant MRS

perfect complements - 2 goods with right angle indifference curves

close subs - not very bowed

close complements - very bowed

optimization

consumers best choice, optimum is MRS (marginal rate of substitution) = relative price

opportunity cost

whatever must be given up to obtain something