Econ Midterm 3

Monopoly

A market structure in which a single firm is the sole seller of a product with no close substitutes.

Market Power

The ability of a firm to influence the price of its product.

Barriers to Entry

Factors that prevent other firms from entering the market.

Monopoly Resources

When a single firm owns a key resource required for production.

Government-Created Monopolies

Monopolies established through patents or copyrights.

Natural Monopoly

A market where a single firm can supply the good at a lower cost than multiple firms.

Perfect Competition vs Monopoly

Competitive firms are price takers; monopolies are price makers.

Monopolist's Demand Curve

Downward-sloping; to sell more, price must decrease.

Marginal Revenue of a Monopolist

Less than price due to the price effect.

Profit-Maximizing Rule for Monopolies

Produce quantity where MR = MC.

Monopoly Price

Determined from the demand curve at the profit-maximizing quantity.

Monopoly Profit

Profit = (Price - ATC) × Quantity.

No Supply Curve for Monopoly

A monopolist is a price maker, so there is no supply curve.

Monopoly and Efficiency

Monopolies produce less than the socially efficient quantity.

Deadweight Loss from Monopoly

Occurs because P > MC, so not all consumers who value the good at cost can buy it.

Price Discrimination

Selling the same good at different prices to different customers.

Perfect Price Discrimination

Charging each customer their willingness to pay, eliminating consumer surplus.

Examples of Price Discrimination

Movie tickets, airline pricing, coupons, financial aid.

Antitrust Laws

Laws aimed at promoting competition and reducing monopoly power.

Marginal-Cost Pricing

Setting price equal to marginal cost, may cause losses for natural monopolies.

Budget Constraint

The limit on consumption bundles a consumer can afford.

Slope of Budget Constraint

Equals the relative price of the good on the X-axis.

Shift in Budget Constraint (Income)

Budget line shifts outward with more income, inward with less.

Shift in Budget Constraint (Price)

A change in price changes the slope of the constraint.

Indifference Curve

Shows bundles that give the consumer equal satisfaction.

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to trade one good for another.

Property 1 of Indifference Curves

Higher curves are preferred to lower ones.

Property 2 of Indifference Curves

Curves slope downward.

Property 3 of Indifference Curves

Curves do not cross.

Property 4 of Indifference Curves

Curves are bowed inward.

Perfect Substitutes

Goods with straight-line indifference curves.

Perfect Complements

Goods with right-angle indifference curves.

Consumer Optimum

Where budget constraint is tangent to the highest possible indifference curve.

Optimization Condition

MRS = Relative Price.

Normal Good

Quantity demanded increases as income increases.

Inferior Good

Quantity demanded decreases as income increases.

Substitution Effect

Change in consumption due to a change in relative prices.

Income Effect

Change in consumption due to a change in purchasing power.

Giffen Good

A good for which an increase in price increases quantity demanded.

Deriving the Demand Curve

From a series of optimal consumption choices as price changes.