# Chapter 15: Monopoly

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### Monopoly

Firm that is the sole seller of a product without close substitutes
(Price Maker)

### Barriers to Entry

-monopoly resources
-Government regulation
-the production process

### Reasons why monopolies arise

-monopoly resources
-Government regulation
-the production process

### Government Regulation

gives a single firm exclusive right to produce good or service
-Higher prices
-higher profit

### Monopoly Resources

key resources required for production owned by single firm
-higher prices

### Production Process

-single firm can produce output at lower cost than larger can
-larger number of producers

### Natural Monopoly

single firm can supply good or service to entire market

### For natural monopoly club goods are....

excludable but not rival in competition

### Firm has natural monopoly if....

ATC curve continually declines

### Monopoly

-price maker
-sole producer
-downward sloping demand (Market demand curve)

### Competitive Firm

-price taker
-one producer of many
-demand-horizontal line/price

horizontal

### Monopolist's Demand Curve is....

Diagonally declining

TR=P x Q

### Average Revenue

(Revenue per unit sold)
TR/Q

### Marginal Revenue (MR<P)

-Revenue per each additional unit of output
-change in total revenue when output increases by 1 unit
-can be negative

### Output Effect

-Q is higher
-increase total revenue

### Price Effect

-P is lower
-Decrease total revenue

### because MR<P the MR curve is.....

below the demand curve

### demand curve shows how....

the quantity affects the price of the good

### marginal revenue shows how....

the firm's revenue changes when quantity increases by 1 unit

### Marginal revenue is always less than the price because.....

the price on all units sold must fall if the monopoly increase production

### Profit Maximization: If MR>MC then.....

increase production

produce less

MR=MC

### In a monopoly price.....

exceeds marginal cost

### Profit:

TR-TC = (P-ATC) xQ

### benevolent planner

maximize total surplus

### A benevolent social planner who wanted to maximize total surplus in a market would...

choose the level of output where the demand curve and marginal cost curve intersect.
-below this level the value of the good to the marginal buyer exceeds the marginal cost of making the good
-above this level the value to the marginal buyer is less than marginal cost

### monopoly produces.....

less than the socially efficient quantity of output

triangle between the demand curve and MC curve

### Price discrimination

-sell same good at different prices to different customers
-strategy to increase profit
-can raise economic welfare
-requires ability to separate customers according to their willingness to pay

### Perfect Price Discrimination

-charge each customer a different price
-monopolist get the entire surplus

### Without Price Discrimination

-single price> MC
-consumer surplus
-producer surplus (Profit)

### Examples of Price Discrimination

-movie tickets
-airline prices
-discount coupons
-financial aid
-quantity discounts

### Because a natural monopoly has declining average total cost....

marginal cost is less than average total cost. Therefor if regulators require a natural monopoly to change a price equal to marginal cost, price will be below average total cost and monopoly will lose money

### One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces where.....

marginal cost equals marginal revenue, while a monopolist produces where price exceeds marginal cost.

### If a profit- maximizing monopolist faces a downward sloping market demand curve, its....

marginal revenue is less than the price of the product

### When a monopoly increases its input in sales...

the output effect works to increase total revenue, and the price effect works to decrease total revenue

### Monopolies are not socially optimal because they....

restrict output below the socially efficient level of production

### When we compare economic welfare in a monopoly market to a competitive market, the profits earned by the monopolist represent...

a transfer of benefits from the consumer to the producer
-profits are not the DWL they're just money that used to be part of the consumer surplus

### Selling a good at a price determined by the intersection of the demand curve and the marginal cost curve is consistent with the....

-socially-optimal level of output
-market solution for a profit-maximizing monopoly

Example: