Econ 102 Chapter 10
Terms in this set (21)
characterized by a single seller who produces a well-defined product for which there are no good substitutes (must have something unique to sell and must also have a way to prevent potential competitors from entering the market)
measures the ability of firms to the price for a good
barriers to entry
restrict the entry of new firms into a market (natural barriers and barriers created by government)
control of resources
the best way to limit competition is to control a resource that is essential in the production process, especially a scarce resource
problems raising capital
it's unlikely that a bank or venture capital company would lend you enough to start a business that could compete effectively with a well-established company (monopoly)
economies of scale
in an industry that has large economies of scale, production costs per unit continue to fall as the firm expands. smaller rivals will have much higher average costs that prevent them from competing with a larger company.
exists when a single seller experiences lower average total costs than any potential competitor
The government gives a single firm the exclusive right to sell a good or service, minimizes the existence of externalities
patents and copyright law
the copyright is the government's assurance that no one else can play or sell the work without the artist's permission
monopolists have some control over the price they charge
how monopolists maximize profits
use the profit maximizing rule MR=MC
how monopolists calculate total revenue
TR=Q x P
How can a monopolist gain additional output?
the firm must lower its price; impact on total revenue depends on how many new customers buy the good because of the lower price
Can we be sure about the profits a monopolist makes?
No, since a monopolist benefits from barriers that limit the entry of competitors into the industry, we would expect profits. However, this is not guaranteed. Monopolies do not control the demand for the product they sell. Consequently, in the short run the monopolist may experience profits (if demand is high) or losses (if demand is low)
occurs when the output level of the firm is inefficient
occurs when resources are used to secure monopoly rights through the political process - a form of competition that produces an undesirable result
How does the government help limit monopoly outcomes and restore a competitive balance?
This is done through antitrust legislation designed to prevent monopoly practices and promote competition (since the passage of the Sherman Act)
What does reducing trade barriers do?
Creates more competition, reduces the influence of monopoly, and promotes the efficient use of resources.
How are monopolies created?
Monopoly is a market structure characterized by a single seller who produces a well defined product with few good substitutes.
Monopolies operate in a market with high barriers to entry, the chief source of market power.
How much do monopolies charge and how much do they produce?
Monopolists are price makers who may earn long-run profits. Like perfectly competitive firms, a monopoly tries to maximize its profits. To do so, it uses the profit maximizing rule, or MR = MC, to select the optimal quantity.
What are the problems with, and solutions for, monopoly?
From an efficiency standpoint, the monopolist charges too much and produces too little. Since the output of the monopolist is smaller than would exist in a competitive market, monopolies lead to deadweight loss.
Government grants of monopoly power encourage rent seeking.
There are four potential solutions to the problem of monopoly. First, the government may break up firms that gain too much market power in order to restore a competitive market. Second, government can promote open markets by reducing trade barriers. Third, the government can regulate a monopolist's ability to charge excessive prices. Finally, there are circumstances in which it is better to leave the monopolist alone.