unit 4 econ

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12th grade ap microeconomics

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23 Terms

1
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conditions of a monopoly

- single seller
- consumer surplus is less due to higher prices
- price makers
- barriers to entry is impossible
- wasteful and inefficient for society
- P > MR

2
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how monopolies can be wasteful/inefficient for society

- allocative: price does not equal marginal cost
- productive: quantity produced is not at lowest ATC

3
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monopoly barriers to entry

- economies of scale
- legal barriers
- ownership of essential resources
- pricing and strategic barriers

4
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economies of scale (barriers to entry)

- control over resource market allows monopoly to set it's own prices, thus having a downward LRATC
- no other company could compete with a monopoly who has this control over their costs
- larger companies could buy in bulk, reducing their production cost

5
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legal barriers (barriers to entry)

patents and licenses are methods for an innovative firm to protect its monopoly power over a particular market

6
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ownership of essential resources (barriers to entry)

for example, a mining company that owns the land the minerals are mined at

7
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pricing and strategic barriers (barriers to entry)

- companies can deter new competitors by lowering their prices so it makes short-term losses
- this keeps consumers from buying the new firm's output, since its higher start-up costs prevent it from competing on price

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MRDARP

- MR curve is below D curve
- monopoly must lower price to sell more output/increase demand
- charges on elastic demand range

9
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single-price (pure) monopoly

- firm can make the price
- P > MC at MR=MC quantity
- not productively efficient (P not at lowest ATC)
- not allocatively efficient (P≠MC)
- faces entire market demand curve
- takes advantage of economies of scale

10
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monopoly in the long run

- since barriers to entry are high, no other firm can enter and dissolve the short-term profits
- profit: new firms will enter, driving down demand for firms already in the market, until there is no economic profit
- loss: firms will leave, driving up the demand for firms already in the market

11
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monopoly efficiency

- not allocatively efficient bc price not at MC=S
- not productively efficient bc doesn't produce at lowest ATC
- no competitive pressure to produce at minimum possible costs

12
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perfect price discriminating monopoly

charges a different price for every unit it produces without any true cost differential to justify the different price

13
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price discrimination monopoly

- charging different price to different consumers for the same product
- ability to separate consumers
- ability to prevent resales
- reduces consumer surplus
- produces closer to its lowest ATC
- produces at optimal quantity (S=D)
- MR=D (one curve)
- little consumer surplus exists

14
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natural monopoly

- costs are minimized by having a single producer of the product
- exists in the long run
- buying power
- large business can supply the entire market at a lower price than two or more smaller ones
- competition might increase costs and prices
- long run average cost curve falls
- natural for only one firm to produce because they can produce at the lowest cost
- ATC and MC slopes downward across demand curve
- allocatively efficient
- not productively efficient

15
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government regulation on monopolies

- price ceilings and per unit subsidies: keep prices low and make nondiscriminating monopolies more allocative efficient (increase consumer surplus)
- socially optimal price ceiling below ATC -> lump-sum subsidy
- per unit subsidy: shifts MC down, resulting in more Q and lower P, DWL

16
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monopolistic competition conditions

- several firms
- easy entry and exit
- products are not identical, but similar
- product differentiation
- firm demand shifts with MR as firms enter or exit
- cost changes for one firm will not impact market supply

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product differentiation

selling the same product to different groups of customers at different prices

18
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horizontal mergers

merging within the same industry

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conglomerates

a company buys a business in an unrelated market

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monopolistic competition in the long run

- zero/normal economic profit: since entry and exit of firms is possible and products can be differentiated in the long run, any short run profits will be eliminated, taking away demand from existing firms
- excess capacity

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excess capacity

- mono comps don't operate at their minimum average total cost
- on graph, it's the difference in Q between profit maximizing quantity and lowest ATC Q

22
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oligopoly conditions

- few firms
- products are normally identical/very similar
- high barriers to entry
- long run profits possible
- actions of one affects all the producers (interdependence)
- fierce competition of collusion: price fixing
- rely on advertising to differentiate
- very little price competition
- pricing and output tend to be relatively stable
- price leadership: firms follow pricing strategies of competitors
- game theory

23
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price fixing

an agreement to act together or behave in a cooperative manner