Chapter 13: Monopoly

These flashcards cover key definitions and concepts related to monopolies including market power, monopolist behavior, deadweight loss, and regulatory mechanisms.

What is market power?

The power to raise price above marginal cost without fear that other firms will enter the market.

Define monopoly.

A firm with market power.

What is marginal revenue (MR)?

The change in total revenue from selling an additional unit.

What happens to a monopolist's price when maximizing profit?

A monopolist produces at the level of output where marginal cost (MC) equals marginal revenue (MR) and must lower its price to sell an additional unit.

What does the term 'deadweight loss' refer to in the context of monopolies?

Sales that do not occur because the monopoly price is above the competitive price, reducing total surplus.

How do patents contribute to market power?

Patents give exclusive rights to make, use, or sell a product, preventing competition.

What are the two effects that make pharmaceutical demand inelastic?

The 'you can’t take it with you' effect and the 'other people’s money' effect.

What is the significance of economies of scale in monopolies?

Economies of scale reduce average costs as quantity increases, allowing a single firm to supply the entire market at a lower cost than multiple firms.

What is a natural monopoly?

A situation where a single firm can supply the entire market at a lower cost than two or more firms can.

Name two sources of market power.

Barriers to entry and network effects.

What are antitrust laws?

Laws designed to prevent monopolies and promote competition.

What is the Sherman Act?

An important U.S. antitrust law passed in 1890 that gives the federal government authority to prosecute monopolies.