102 terms


A perfectly competitive firm should always...
Produce the quantity where its marginal cost equals its marginal revenue
A firm that is producing at the lowest possible average cost is always:
productively efficient
Assume that a perfectly competive firm that produces widgets is in long-run equilibrium. Then suddenly the market demand for widgets increases. The firm will
Make an economic profit and produce mroe in the short run
A perfectly competive firm that is receiving a price of $5 and has a marginal cost of $6 should always
decrease output
A perfectly competitive INDUSTRY has what kind of demand curve
negatively sloped
A firm in a perfectly competitive industry has what kind of demand curve?
perfectly elastic demand curve
What are the four market models (structures?
perfect (pure) competition, monopoly,monopolistic competition, oligopoly
what are the characteristics of pure competition (perfect competition)?
large number of buyers and sellers, homogenous (standardized) product, no barriers to new firms entering mkt., firms are price takers and have a perfectly elastic demand.
In a perfectly competitive mkt. equilibrium, max production and max profits aoocur at what point?
When MR=MC
What is equal to Price in a perfectly competitive mkt.?
In a perfectly competitive mkt. a firm oculd be doing what in the shortrun?
earning profits, generating losses, breaking even.
What is the Optimal Output Rule in a perfectly competitive mkt.?
MR=MC Profit is maximized by producing the quantity for which the marginal cost is equal to the marginal revenue
In a perfectly competitive mkt. if TR>TC what is happening?
Company is generating economic profits
In a perfectly competitive mkt. if TR<TC what is happening?
Company is generating economic losses
In a perfectly competitive mkt. if TR=TC what is happening?
the firm is earning zero economic profits and is covering explicit and implicit costs
What is another name for zero economic profit?
Normal rate of return
A perfectly competitive firm that is in long-run equilibrium will
not earn an economic profit but be allocatively efficient and productively efficient
In a perfectly competitive mkt. if TR>TVC or equal to what should the firm do?
Continue operations
In a perfectly competitive mkt. if TR<TVC or equal to what should the firm do?
shut down now
In a perfectly competitive mkt. if (price)AR >AVC or equal to what should the firm do?
continue business
In a perfectly competitive mkt. if (price) AR<AVC or equal to what should the firm do?
Shut Down
The short run supply curve of an individual firm in a perfectly competitive mkt. is identical with what?
The portion of the MC curve above the minimum of the AVC curve
short run mkt. supply curve of firms are the same as the industry supply curve Why?
There isn't enough time in the short run for new firms to enter the market.
What happens to price in the longrun if firms are making economic profits in a perfectly competitive mkt.?
More firms enter and this pushes the price down
What happens to price in the longrun if firms are making economic losses in a perfectly competitive mkt.?
Firms leave the industry and the price goes up
In a perfectly competitive market where is equilibrium?
Zero economic profits (normal rate of return) this is where MR=MC
At what point on the ATC curve is equilibrium?
At the lowest point on the ATC curve.
Is a stock market a perfectly competitive market?
Is a book publihers a perfectly competitive market?
Why can't a firm in a perfectly competitive industry charge a price above the market-clearing price?
Numerous competitors produce the same product and charge the MARKET price
A firm sells grapefuit at $1.50 a pound what is the firms marginal revenue?
equals $1.50 because in a perfectly comp. industry P=AR=MR=D
At what poin in a perfectly competitive mkt. are profits maximized in the shortrun?
Where marginal revenue is equal to marginal costs.
Why are pure monoplies a rarity?
Few goods and services rarely have only one producer
What are charcteristics fo a monopoly?
1.One seller-firm and the industry are the same2.Unique product/no substitutes3.major barriers to mkt.entry4.Price Makers who pick price that will max profits5. downward sloping demand
what does the demand curve of a monopoly look like?
Downward sloping
Where is the MR curve in relation to the damnd curve on a monopoly graph?
MR curve is always below the demand curve
In a monopoly what are the barriers to entry?
1.Legal barriers-franchising, licensing, patents 2.Economies of Scale3. Contorl of important inputs4. pricing and other strategic barriers
Economies of scale
reductions (declining ATC curve) in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run. The mroe it produces the less the ATC.
What is another name for economies of scale?
Economies of Mass production
An exclusive right of inventors to produce and sell a new product or machine for 20 years from the time of application
How do you figure profit in a monopoly?
TR - TC or (P- ATC) xQ
How do you figure total revenue in any industry?
P x Q
How do you figure total cost in any industry?
Why does a monopoly continue to make profits in the long run while an industry in perfect competition cannot?
In perfect competition if profits are being made other firms will enter the industry bringing prices down. In a monoply no new firms can enter due to barriers, therefore the monoply will continue to make profits.
In a monopoly what is equal to price?
AR/Average Revenue
In a monopoly where is price in relation to marginal revenue?
P > MR and/or MR < P
In a monoply where is the market demand curve?
It is above the MR curve and is the SAME as the demand curve because the firm and the industry are one.
If the monopolists reduces output, what will the price do?
The price will rise.
If the monoplist increases output, what will the price do?
The price will fall.
How is price determined in a monopoly?
Price is set in elastic region at the price that the industry believes the customer is willing to pay...NOT where MR=MC which is where price is set in perfect competition.
How is amount of output determined in a monopoly?
At any point ABOVE MC where the elasticity of demand has been determined to be low.(where the cusotmore will pay the most)
What laws make monopolys illegal?
Anti-Trust laws
When is a mon0poly not illegal?
Whe it was created by the government
Are monopolys efficient?
NO, because the monopoly will produce less so they can charge a higher price.
Is a natural monopoly illegal?
Natural monopoly
AN industry inwhich economies of scale are so great that a single firm can produce the product at a lower average totalo cost then would be possible if more then one firm produced the product]
Economies of scale put simply
only one firm can survive
In comparison to a competitive mkts prices, what can you say about price in a monopoly?
Monopolys charge a higher price and customers are willing to pay it due to low elasticity of demand.
Where do monoplys set price?
Above MC yet in the elastic region
In a Monoply short run supply curve is equivalent to what?
Long run supply curve and marginal costs so MC=short and long run supply curve.
What is price descrimination?
Selling the same product to different buyers at different prices (ex: discounts for the elderly)
In economies of scale why can't a new firm compete even if they try?
Small industry can't afford the HUGE costs (for ex. electric plant) and if they could afford to build it they oculdn't afford to compete witht he already existing monopoly who could afford to greatly lower their price to compete.
In what are of elasticity of demand curve will a monoploist want to operate?
In some price and quantity region within the elastic region of elasticisty but.
At what point is profit maximized in a monopoly?
At any point UP TO where MR=MC...P will always be above MC in a monoply
Where on graph is a monopolys maximizing price?
At the poin where price and quantity meet the Demand curve.
In a monopoly why does the MR curve lie below the Demand curve?
Gain in revenue from an extra unit of output is less than the price charged for that unit of output.
In a monopoly how can total economic profit be found?
By subtracting total cost from total revenue or (PxQ) - (ATCxQ)
Where is profit maximizing output on a graph of a monopoly?
It is at the point where marginal revenue equals marginal cost (MR=MC) pg. 208)
Where is profit maximizing price in a monopoly?
Straight up from output to Demand curve. Draw a line to price and you have the profit maximizing price.
monopolist will expand production only within the elastic portion of demand curve (why?
total revenue (TR) will rise and demand is elastic (i.e., price reduction causes TR to rise)
compa red to a fir m und er PC, a m onopo list produces
a smaller quantity,charges a higher price, and earns a positive economic profit
a monopolist that faces a market with very elastic demand will do what?
behave more like a perfectly competitive firm
WHY do costs differ between perfect competion industry and monpoly industry?
economies of scale, x-inefficiency, the need for monopoly preserving expenditures, and the VERY long-run prespective
Monopoly power
Ability to control output nad price
Market segregation
Seperation of buyers into distinct classes (ex: elderly, children, business travelers, non-business travelers
No resale:
Original purchaser cannot resale product because their is no market for it:resale is impossible
Price discrimination conditions
no reale, monoploy power, market segregation
Are coupons price discriminators?
Is selling cheaper in bulk a price discrimination?
Is selling cheaper in U.S. then in RUssia price discrimination?
Is selling at higher rates to business travelers price discrimination?
At what point of Demand curve does a monopoly operate?
Where P exceeds ATC.
At what point on demand curve is fair market price for a monopoly?
Where P=ATC on Demand curve
At what point on demand curve is Socially optimal price?
Where P=MC on Demand curve
WHo had/has a monopoly on diamonds?
De Beers
What are welfare losses?
the loss to consumers is greater than the gain in profits for the monopoly and total surplus is less under monopoly than under perfect competition
Why is allocative efficiency not achieved in a monopoly?
P(what product is worth to consumers) > MC (what the resources used to make the product are worth)
What are the two major public policies toward natural monopolies:
public ownership or regulation
What is meant by public ownership of a monopoly?
the good is supplied by the government or by a firm owned by the government
What does price regulation do to a monopoly?
limits the price that a monopoist is allowed to charge
What does price regulation of natural monopolies NOT lead to?
does not lead to shortages as long as price is above marginal cost
How does a monopoly affect income inequality?
Increases income inequality
For what purpose to monopolys pursue new technology?
To reduce costs.
A monopoly firm can sell as much as it wants at any price if likes? T or F
A monopoly like perfect competition mazimizes profits at a point where MR=MC? T or F
A monopoly restricts output and charges higher price relative to what would occur if a market were perfectly competitive. T or F
This is True
A demand curve faced by a monopolist is the same as the MR curve. T or F
this is false
When does a natural monopoly exist?
Whne a large firm can produce a product at a lower per unit cost than can a smaller firm.
What does the U.S. Postal service have a monopoly on?
delivery of first-class mail
Does a monopoly firm always earn an economic profit?
NO they do not
Does a monopoly set price to maximize profit?
Yes they do
Where on a graph doe sa monoploly set price to maximize profit?
Price minus ATC=profit per unit