Chapter 11 Flashcards (Pure Monopoly)

Characteristics of a pure monopoly?

1. Single Seller

2. No close substitutes

3. Price Maker: full control over the price

4. Blocked entry: strong barriers to entry

5. Non-Price Competition: Mostly PR but can engage in advertising

What’re “barriers to entry?” What’re some barriers to entry?

1. Economies of scale

2. Network Effects

3. Legal Barriers to entry like patents and licenses

4. Ownership or control of essential resources

5. Pricing and other strategic barriers

What must pure monopolists and other market structures with a downward sloping demand curve do to sell more units

lower the price

What’re some assumptions of monopolistic demand?

• Not regulated by government

• Single price monopolist

• Secured by economies of scale, networking effects, resource ownership, etc.

What’re the characteristics of Monopoly Demand and Price?

• Marginal revenue will be less than price

• Monopolist is a price maker

• Monopolist sets price in the elastic region of the demand curve to maximize revenue

How do you graphically determine the profit maximizing output?

1. Determine the profit maximizing output by finding where MR = MC

2. Determine the profit maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist demand curve

3. Determine the pure monopolist economic profit by finding profit per unit by subtracting the average total cost of the profit maximizing output from he profit maximizing price. Then multiply the difference by the profit maximizing output to determine economic profit (if any)

What’re some misconceptions of Monopoly Pricing?

• The monopolist doesn’t charge the highest possible price

• Monopolist is interested in total profit not per unit profit

• There is a possibility that a monopolist will experience losses, they are not exempt from experiencing the effects of changes in demand and costs

What would prohibit a monopolist from making a profit

• Low demand and high costs

What’re the economic effects of monopolies?

• Income Transfer: Income is transferred from consumers to to business owners which leads to the redistribution of income to high income business owners

What’re antitrust laws?

Antitrust laws are when the government intervenes when monopoly power starts to have an adverse effect on the economy.

If the government decides that it’s beneficial to have a monopoly…

• They regulate it: Government determines the price and quantity

If the government decides that it’s NOT beneficial to have a monopoly…

• They ignore it: They let time and markets get rid of the monopoly

What’s price discrimination?

The act of charging different buyers different prices - the price differences aren’t based on cost differences

Conditions for success:

• Monopoly power

• Market Segregation

• No resale

What’s socially optimal price?

When the price is set equal to marginal cost

Whats fair return price?

When the price is set equal to the average total cost. This is a delimma of regulation