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Chapter 15: Monopoly

STUDY
PLAY
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
-Patents + copyrights
-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
Competitive Firms Demand Curve is....
horizontal
Monopolist's Demand Curve is....
Diagonally declining
Monopolies Revenue
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
Profit Maximization: If MR< MC then....
produce less
Maximize profit at
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
-deadweight loss
The deadweight loss is....
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
-no deadweight loss
Without Price Discrimination
-single price> MC
-consumer surplus
-producer surplus (Profit)
Deadweight loss
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