Microeconomics - Chapter 13

Monopoly

what is a monopoly

an industry controlled by a monopolist

def of market power

the ability of a firm to raise prices

what does a monopolist do

reduces the quantity supplied and moves up the demand curve which raises the price

why do monopolies exist

because there are barriers to entry

5 types of barriers to entry

control of a scarce resource or input, increasing returns to scale, technological superiority, network externalities, and government-made barriers

explain control of a scarce resource or input

a monopolist that controls a crucial resource or input can prevent other firms from entering its market

explain increasing returns to scale (economies of scale)

when the average total cost falls as output increases, firms then to grow larger. increasing returns to scale can give rise to and sustain a monopoly

explain technological superiority

a firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist

explain network externality

the value of a good or service to an individual increases as more individuals use the same good or service

explain government-made barrier

a patent gives an inventor a temporary monopoly in the use or sale of an invention. a copyright give the creator of a literary or artistic work sole rights to profit from that work.

can monopolists choose the price

yes

all firms follow the same profit-maximizing rule

profit is maximized at the Q where MR=MC

what is the equation for marginal revenue

the change in total revenue / the change in quantity outputed

MR is _____ the demand curve because _______

below; of the price effect

when a monopolist increases production what effects happen?

the quantity effect and the price effect

explain the quantity effect

one more unit is sold, increasing total revenue by the price at which the unit sold

explain the price effect

to sell the last unit, the monopolist must cut the market price on all units sold; this decreases total revenue

C

recreate the monopolist’s profit-maximizing output and price graph

B

how is a monopoly a source of inefficiency

the losses to consumer from monopoly behavior are larger than the gains to the monopolist

recreate the graph the shows how a monopoly causes inefficiencies

what are policy options to deal with natural monopolies

public ownership and regulation

explain public ownership

the government establishes a public agency to provide the good and protect consumers’ interest. (These are usually poorly run)

explain regulation

a price ceiling imposed on a monopolist does not create shortages if it its not set too low

recreate an unregulated and regulated natural monopoly graph

recreate the graph of logic of price discrimination

what is price discrimination

firms charge different prices to different consumers for the same good

recreate price discrimination increases sales and profits graph

perfect price discrimination=

the maximum price each group is willing to pay

what is a firm able to do under perfect price discrimination

the firm captures all consumer surplus as profit

recreate the perfect price discrimination graph

what are features of the perfect price discrimination graph

there is no deadweight loss and there is zero consumer surplus

what are common techniques for price discrimination

advance purchase restrictions, volume discounts, two-part tariffs, sales and outlet stores, and digital personalized pricing