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Microeconomics Chapter 10
Terms in this set (93)
Adam Smith's invisible hand, which channels the behavior of perfectly competitive firms into a socially beneficial outcome-- doenst poke, prod, or even lay a finger on a monopoly firm.
Left unchecked, it will not create the best of all possible worlds for consumers.
A monopoly does not have _______ power.
Unlimited, monopolies are remarkably predictable
Give some examples of monopolies.
US postal service, cable television (provided by neighborhoods), doctors (given small town), Movie theater (given small town)
What is a monopoly?
Refers to a market in which only one firm sells a product with no close substitutes or the single firm that sells in that market. THe only seller in a market, or a market with just one seller.
Notice the phrase "no close substitutes." THis phrase suggests...
that deciding whether a market or firm is a monopoly depends on how easily it is for consumers to substitute the products of other sellers. This can be a matter of judgement.
What does it mean when there is an in-between monopoly?
THe available substitutes are not very close. Ex. Cable television. Substitutes include iTunes or Netflix but are not exactly the same product. Economists typically think of cable tv as a monopoly.
Why do monopolies exist?
Some sort of barrier is in the way of new firms entering into the market.
What are some barriers to entry?
Economies of scale, legal barriers, and Network externalities
Recall that economies of scale cause...
the firm's long run average cost curve to slope downward-- that is, the more output it produces, the lower will be its cost per unit. If economies of scale persists through a large enough range of output, then a single firm can produce for the entire market at lower cost than could two or more firms.
Look at page 283 for explanation of graph on page
The first from to locate in a town will have a _______ over an potential new entrants. THis will tend to keep newcomers out of the market.
What is a monopoly that arises because of economies of scale?
What are some examples of a natural monopoly?
Local monopolies (one gas station, one food market, one doctor, and so on)
In the case of a natural monopoly, because there are sizable _________ and the market is small, the first firm to enter the market will lily be the last.
What are the two most important legal barriers that give rise to monopolies?
Protection of intellectual property and government franchise
What is the market for a specific intellectual property a monopoly?
One firm or individual owns the property and is the sole seller of the righters to use it.
Prices tend to be _________ under monopoly than under perfect competition.
In dealing with intellectual property, government ideally strikes a compromise: It allows the creators of intellectual property to enjoy a monopoly and earn economic profit, but only ___________.
Only for a limited period of time. Once the time is up, other sellers are permitted to enter into the market.
What are two important types of legal protection of intellectual property rights?
Patents and copyright
What is a patent?
A temporary grant of monopoly rights over a new product or scientific discovery.
What is a copyright?
A grant of exclusive rights to sell a literary, musical, or artistic work.
Some firms have their monopoly status through __________, a grant of exclusive rights over a product.
What is a government granted rights to be the sole seller of a product or service?
When do governments grant franchises?
When they think the market is a natural monopoly. In this case, a single large firm enjoying economies of scale would have a lower cost per unit than multiple smaller firms. The government tries to serve the public interest by ensuring that there are no empetitors that would cause cost per unit to rise.
What must the seller submit to in a government franchise?
Government ownership or control or government regulation over its prices and profits.
Examples of government franchises?
Postal service, local utility companies that provide electricity, gas, and water, as well as garbage collection services.
What are network externalities?
The added benefits for all users of a good or service that arise because other people are using it too.
When network externalities are present, jointing a large network is more beneficial than joining a small network, even if the product in the larger network is somewhat inferior to the product in the smaller one.
Wow, good point. (So a person who has a good idea about a new computer or software program would be laughed at, because windows is already dominant, and because of this dominance, it is preferred)
Give an example of a network externality in reverse.
Facebook surpassing Myspace. The network becomes less valuable to those who remain. Others do not work out, for example, Google+. It is superior to Facebook, but it did not convince users to switch.
Like other firms, monopolies face _________.
What are some constraints faced by monopolies?
Constraints in cost and price it can charge
Monopolies are not price takers but it does face a given demand curve for its product.
The monopoly faces a tradeoff. The higher price it charges, the fewer units it will be able to sell.
What is it called when some firms (including monopolies) charge different prices to different consumers, based on differences in the process that they are willing to pay?
What is a firm that does not employ price discrimination? In other words, they must charge the same price for every unit they sell, regardless of any differences in willingness to pay among their consumers.
Single price firms
For a single price monopoly: Once the firm determines its output levee, it has also determined its _______. Similarly once it determines its _______ it also determines its output level.
Price, price, U the maximum price it can charge and still dell that output level.
Patty's pool example. Page 289 and 290.
Look on both pages for graphs and explanations.
WHen the firm's demand curve slopes downward, marginal revenue is _____ than the price for all increases in output (except the increase from zero to one unit)
When any firm, including a monopoly faces a downward-sloping demand curve, marginal revenue is larger than the marginal price of the output. Therefore, the marginal revenue will ______ the demand curve.
Lie below the demand curve
Why must marginal revenue be less than price?
Because when firm facing a downward sloping demand curve, it must lower the price in order to sell a greater quantity.
Once we have a monopoly's marginal revenue curve, the profit-maximizing output level can be found by applying our new rule which tells us how any firm can find its profit-maximizing output level:
To maxmize profit, a monopoly firm-- should produce the quantity where MC=MR and the MC curve crosses the MR curve from below.
See graph on page 291 a
and maybe an explanation on 292
A monopoly is an example of a firm with _________ power.
What is market power?
The ability to raise price without causing quantity demanded to go to zero.
Any firm facing a downward sloping demanward sloping demand rice has market power:
As it raises its price, quantity demanded falls, but some customers who value the firm's product will continue to buy it at the higher price.
Only _______________ firms, which face a horizontal demand curves, have no market power.
Perfectly competitive firms (for a competitive firm, raising the price reducers quantity demanded)
When a firm has market power it is a _______-- it makes a choice about what price to charge.
What is a price setter?
Firm with market power that selects its price rather than accepting the market price as given.
Profit per unit =
Profit per unit is the _____ between the firm's demand curve ant its ATC curve.
Graphs on page
292 and 293
A monopoly earns a profit whenever P>ATC. Its total profit at the best output level equals...
the area of a rectangle with heigh equal to the distance between P and AC and width equal to the level of output.
In the case of a monopoly suffering a loss the ________ curve lies everywhere above the ________ curve. As a result...
The firm will suffer a loss at any level of output. As the best output level (where MC=MR), the loss will be smallest.
Being a monopolist is no guarantee of _______. If costs are too high, or demand is insufficient, a monopolist may break even or suffer a loss.
A monopoly suffers a loss whenever ___________. Its total loss at the best output level equals the area of a rectangle with height equal to the distance between ATC and P and width equal to the level of output.
A monolpoly market is in equilibrium when the pony firm in the market, the monopoly firm, is....
Maximizing its profit
In the short run, a monopoly may earn an economic profit or suffer an economic loss.
(It may, of course, break even as well.)
But what if a monopoly suffers a loss in the short run?
A firm should shut down if TR<TVC at the output level where marginal revenue and marginal cost are equal.
The statement TR<TVC is equivalent to the statement...
If a monoply operates under a government fanshise or regulation and produces a vital service uch as transportation, the government may not allow it to shut town.
Government will use tax revenue to cover the loss.
Perfectly competitive firms _________ a profit in the long run equilibrium.
Unlike perfectly competitive firms, ___________ may earn economic profit in the long run.
A privately owned, unregulated monopoly suffering an economic loss in the long run will exit the industry, just as would any other business firm.
In the long run, therefore we should not find such monopolies suffering economic losses.
But monopoly also differs from perfect competition in another way:
All else equal, a monopoly market will have a higher price and lower output than a perfectly competitive market.
The market supply curve tells us...
How much it will cost the monopoly to produce another unit of output at each of its plants.
The monopoly, compared to a competitive market, charges _______ and produces _________.
Comparing monopoly and perfect competition, we see that price is higher and output is lower under a ____________.
Monopoly is all else is equal.
In what two ways does government involvement reduce monopoly profit?
Government regulation and rent-seeking activity.
Describe gogovernmetn regulation in terms of reducing monopoly profit?
There government will often want to keep prices high enough to keep the monopoly in business, but no higher. Keep the monopoly's economic profit at zero. If the public commission succeeds, the monopoly's accounting profit will be just enough to match what the owners could earn by investing their funds elsewhere-- that is the monopoly will earn zero economic profit.
Describe rent seeking activity as a way to reduce monopoly economic profit?
The monopoly will often take action to preserve legal barriers to entry. Any costly action a firm undertakes to establish or main tai its monopoly stays is called rent seeking monopoly.
What is economic rent?
Any earnings beyond the minimum needed in order for a good or service to be produced.
A monopoly's economic profit is another example of ______.
Rent seeking includes the time and money spend lobbying legislators and the public for favorable policies.
Monopolies are ______ to shifts in demand.
A monopolist will gernarally react to an increase in demand by producing _______ output, charging a _______ price, and earning a _______ profit. It will react to a decrease in demand by reducing output, lowering price, and suffering a reduction in profit.
more, higher, larger
It appears that while consumers do get some benefit from the technological change, they don't get all the benefit.
Firms keep a chuck go the benefits for itself.
In general a monopoly will pass only part of the benefits from a cost saving technological change to its consumers.
A monopoly will pass only a part of a cost increase on to consumers in the form of a higher price.
What is price discrimination?
Charging different customers for reasons other than differences in cost.
What three conditions must be satisfied in order to price discriminate?
1. Identifying willingness to pay
2. Market Power
3. Prevention of resale
To price discriminate, a firm must have ______ power.
Give an example of identifying willingness to pay.
Airlines and how they target businessmen.
Desciribe the prevention of resale in terms of price discrimination.
Services provided vs goods. Resale of goods is much harder to prevent.
Price discrimination can raise th price for some costumers above the price they would pay under a single price policy.
The additional profit for the firm comes at the expense of the consumers who pay more.
In figure 9: By pushing her output all the way to 40 rolls per day, its Larissa violating the MC=MR rule and decreasing her profit?
Not really. THe MR curve in the figure was drawn under the assumption that Larisa would have to lower her price on all dolls in order to sell more of them. But this is no longer the case. With price discrimination, the MR curve no longer tells us what will happen to Larisa's revenue when she increases her output.
Price discrimination can lower the price for some consumers below the price they would pay under a single-price policy.
Those consumers benefit, while the firm earns higher profit.
What is charging each sutomer the most he or she would be willing to pay for each unit purchased?
Perfect price discrimination
Under ___________ a firm charges each customer the most the customer would be willing to pay for each unit he or she buys.
Perfect price discrimination
For a perfect price discriminator, ____________ is equal to the price of the additional unit sold. Thus the firm's _______ curve is the same as its demand curve.
Marginal revenue, MR
The ______________ increases profit at the expense of consumers, charging each customer the most he or she would willingly pay for the product.
perfect price discriminator
A price discriminating firm facing separate market demand curves in different markets should fosse its price and output levels so that Marginal revenue in each market is equal to its marginal cost of production.
What are some examples of price discrimination?
Rebates, coupons, "groupons," sales, college tuition
A rebate is a way that you can get your money back partially for a product that you bought. By addition time, trouble, and delay for the discount, the store can separate those who are very price sensitive (they will go through the trouble) from those who are not (they will forget about the rebate).
What are groupons?
Living social, Groupon that offer conditional discounts.
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