unit 4 econ

12th grade ap microeconomics

conditions of a monopoly

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

how monopolies can be wasteful/inefficient for society

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

monopoly barriers to entry

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

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

legal barriers (barriers to entry)

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

ownership of essential resources (barriers to entry)

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

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

MRDARP

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

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

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

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

perfect price discriminating monopoly

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

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

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

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

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

product differentiation

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

horizontal mergers

merging within the same industry

conglomerates

a company buys a business in an unrelated market

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

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

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

price fixing

an agreement to act together or behave in a cooperative manner