Econ Chapter 15

the monopolist will maximize profits where

MR = MC

price discrimination

firm is able to divide customers into two or more groups and sell the good at a different price to each -firm has figured out that different groups have higher willingness to pay than others and will charge those groups a higher price

Sherman Anti-Trust Act of 1890

first legislation that was aimed at monopoly power. It made it illegal to monopolize a market or to engage in practices that result in a restraint of trade.

Direct Regulation

gov steps in and decides what price a monopolist should set for its products

characteristics of a monopoly

(1)The firm is the only seller in the industry (2) The product is unique (3) There exists barriers to entry into the indust

deadweight loss =

(total surplus before monopoly) - (total surplus after monopoly)

key differences between the monopoly outcome vs. the perfectly competitive outcome.

• The monopolist will produce less output than the perfectly competitive outcome • The monopolist will charge a higher price than the perfectly competitive outcome • The monopolist will earn above normal (economic) profits in the long run

MR curve will always be

below the demand curve

Government-Run Monopolies

government itself could establish a monopoly and run an industry as if it were a private firm. Examples of government run monopolies include the postal service and state lotteries.

ownership of a key resource

if only 1 firm owns a key input in the production of a good, then they would be the only seller of the good

although the monopolist can set its own price

it cannot charge any price it wants.

unlike perfectly competitive firms, if the monopolist wishes to increase production and sell more output,

it must lower the price of its product.

when economies of scale leads to only one firm in the industry

it's called a natural monopoly

what would happen if all the firms in the perfectly competitive industry consolidated and formed a monopoly?

key difference will be that MR does NOT equal D

problem with gov run monoplies

managers of these monopolies have little incentive to worry about minimizing costs or doing what they can to earn a profit. Since these are government run monopolies, the monopoly can earn losses and still be in operation as the government can provide a subsidy

when a monopolist can perfectly price discriminate, there will be

no deadweight loss as the firm produces the same output as perfect competition

perfect price discrimination

occurs when the firm is able to charge each consumer their exact willingness to pay -firm no longer has to lower the price on all goods sold to sell one more unit

rent seeking

process of taking actions to preserve economic profits -it's a social cost b/c resources that could have been used in other ways

another difference, the MR curve

will no longer equal the demand curve for a monopolist

patent

-gives a firm exclusive right to produce a product for 20 years -encourage the development of technology that otherwise would not have been developed =provides incentives for firms to conduct research and innovation in the form of monopoly profits on the new product over the period covered by the patents. If the monopoly profits are large enough to offset the high research and development costs of a new product, a firm will develop the product and become a monopolist

two effects when a monopolist cuts prices:

(1) The firm gain revenue because it can sell more units (2) The firm loses revenue because the firm must lower the price for units it could have sold at a higher price.

for perfectly competitive industry

1) MC is equivalent to the supply curve 2) MR is equal to the demand curve

firms that are a monopoly have to make 2 decisions

1) how much output to produce 2) what price should they charge for their output

A firm has an opportunity for price discrimination if the following conditions are met

1. Market Power: The firm must have some control over its price. A monopolist certainly would meet this condition, while perfectly competitive firms cannot. 2. Different Consumer Groups: Consumers must differ in their willingness to pay for the product and the firm must be able to identify these different groups of customers. It's quite easy for movie theaters to distinguish senior citizens by asking them to provide an ID as verification of age. 3. Resale is not possible: It must be impractical for one consumer to resell the product to another customer. Airlines have strict rules which prevent one person from buying the ticket and then reselling that ticket to another individual.

Increased Competition Through Anti-Trust Laws

Anti-trust laws are laws that are in place to prevent monopolies and to foster competition in the market.

total surplus =

CS + PS

The Clayton Act of 1914

The Clayton Act outlawed specific practices that discouraged competition such as tying contracts (forcing a customer to buy one product to obtain another), mergers that would substantially reduce competition, and price discrimination that would significantly reduce competition. Congress also created the Federal Trade Commission (FTC) to investigate companies to ensure compliance with the existing anti-trust laws.

Why is the marginal revenue lower than the price of the good?

The reason why the MR curve is below the demand curve is that in order to increase sales, the monopolist must lower the price on all units sold since it faces a downward sloping demand curve. We're assuming that the monopolist can charge only one price in the market (that is the monopolist can't price discriminate-charge different prices to different customers).

with economies of scale,

a large firm will have lower ATC than a smaller firm

a monopoly is

an industry structure where firms have some power over the price they charge

economies of scale (natural monopoly)

defined as a situation where average costs decreases as production increases. -ATC decreases as production increases

consumer surplus

difference between a households willingness to pay and the price actually paid -the area below the demand curve and above the price paid

producer surplus

difference between what price firms receive for their product & the cost of production -area below the price received & above the supply curve

price is determined by

the demand curve. At the profit-max quantity, where the quantity intersect the demand curve is the price

key difference between a monopolists and a perfectly competitive firm

the individual firm in a monopoly is the industry -the industry demand curve is the monopolist demand curve (downward sloping)

key similarity between a monopolist and a perfectly competitive firm

the monopolist will maximize profits where MR=MC. Thus a monopolist will continue to produce output until the MR=MC. In fact for a monopolist, the MR curve will always be below the demand curve.

a monopoly creates a deadweight loss because

the monopoly produces less output than the perfectly competitive industry

do nothing

the solutions to the problem of monopolies might be more costly in the end than the social costs imposed by the monopolies themselves.

monopolies cause inefficiencies b/c

they produce less than socially optimal