Econ test 2 chapter 21

To sell an additional unit of its good

a monopolist needs to lower price This price reduction both gains revenue and loses revenue for the monopolist In the exhibit, the revenue gained and revenue lost are shaded and labeled Marginal revenue is equal to the larger shaded area minus the smaller shaded area. Slide 12 ppt 21

Second-Degree Price Discrimination

a price structure in which A seller charges a uniform price per unit for one specific quantity, and a lower price for an additional unit of quantity (volume)

Third-Degree Price Discrimination

a price structure in which A seller charges different prices in different markets or charges a different price to different segments of the buying population

Perfect Price Discrimination

a price structure in which A seller charges the highest price each consumer is willing to pay for the product rather than go without it

price searcher monopolist

has the ability to control to some degree the price of the product it sells The monopolist seeks a price which maximizes profit This is consistent with the profit maximization rule

The perfectly competitive firms charges

the same price for each unit of the good it sells

A theory of market structure based on three assumptions:

1.There is one seller 2.It sells a product for which no close substitutes exist 3.There are extremely high barriers to entry

Perfect competition: P =

= MR and P = MC The perfectly competitive firm charges a price equal to marginal cost

Rent seeking

Actions of individuals and groups who spend resources to influence public policy in the hope of redistributing (transferring) income to themselves from others.

Why must a seller be a price searcher (among other things) before he can price discriminate?

A seller who is not a price searcher is a price taker. A price taker can sell a product at only one price, the market equilibrium price A price taker cannot price discriminate

Suppose a perfectly competitive firm produces 100 units of good X, but a monopoly firm would produce only 70

Buyers value these 30 units by more than it would cost the monopoly firm to produce them The net benefit (benefits to buyers minus costs to the monopolist) of producing these 30 units is said to be the deadweight loss of monopoly

barriers to enter

Economies of scale exist when a firm doubles inputs and its output more than doubles This lowers its unit costs (average total costs) in the process If economies of scale exist only when a firm produces a large quantity of output and one firm is already producing this level of output, then... New firms (that initially produce less output) will have higher unit costs than those of the established firm This will make the new firms uncompetitive when compared to the established firm In other words, economies of scale act as a barrier to entry, effectively preventing firms from entering the industry and competing with the established firm

Economies of scale

Exist when inputs are increased by some percentage and outputs increase by a greater percentage causing unit costs to fall.

Monopolist Demand Curve

It follows that the demand curve for the monopoly firm is the market demand curve, which is downward sloping A downward-sloping demand curve reflects the inverse relationship between price and quantity demanded: More quantity is sold at lower prices than at higher prices, ceteris paribus The monopolist can raise its price and still sell its product (though not as much).

barriers to enter a monopoly

Legal barriers Economies of scale Exclusive ownership of a necessary resource

Monopoly: P >

MR and P > MC the monopolist charges a price greater than marginal cost

Legal barriers to enter a monopoly

Public franchises - A right granted to a firm by government that permits the firm to provide a particular good or service and excludes all others from doing the same Patents - granted to inventors of a product or process for a period of 20 years Government licenses - required to carry on a business or occupation

The monopolist produces the quantity of output

Q1) at which MR= MC It charges the highest price per unit at which this quantity of output can be sold (P1) Notice that at the profit-maximizing quantity of output, price is greater than marginal cost, P >MC

natural monopoly

The condition where economies of scale are so pronounced that only one firm can survive.

consumer surplus

The difference between the maximum price a buyer is willing and able to pay and the actual price paid Maximized under perfect competition Minimized under monopoly

Rent Seeking behavior

The economist views rent seeking is a socially wasteful activity because resources are expended to transfer income rather than to produce goods and services.

X-inefficiency

The increase in costs and organizational slack in a monopoly resulting from the lack of competitive pressure to push costs down to their lowest possible level Unlike perfect competition

Deadweight loss of monopoly

The net value (value to buyers over and above costs to suppliers) of the difference between the monopoly quantity of output (where P > MC) and the competitive quantity of output (where P = MC). The loss of not producing a perfectly competitive quantity of output

Conditions of Price Discrimination

The seller must exercise some control over price; that is, it must be a price searcher The seller must be able to distinguish among buyers who would be willing to pay different prices It must be impossible or too costly for one buyer to resell the good to other buyers That is, the possibility of arbitrage*, or "buying low and selling high," must not be possible or exist

The perfectly price-discriminating monopolist charges

a different price for each unit of the good it sells

Price Discrimination

a price structure in which the seller charges different prices for the product it sells and the price differences do not reflect cost differences (A seller who charges different prices for the product it sells that do not reflect cost differences of servicing those buyers)

A monopoly seller is not guaranteed

any profits Here, price is above average total cost at Q1 Q1 is the quantity of output at which MR = MC. TR (the area 0P1BQ1) is greater than TC (the area 0CAQ1), and profits equal the area CP1BA. Slide 17

The monopoly firm and the industry

are the same thing

Pricing is not as beneficial to the consumer

in a monopoly market structure as compared to perfect competition

A firm is resource allocative efficient when

it charges a price equal to its marginal cost (P = MC) The monopolist does not do this; it charges a price above marginal cost Profit maximization (MR = MC ) does not lead to resource allocative efficiency (P = MC ) Because for the monopolist P > MR. This is not the case for the perfectly competitive firm, where P = MR.

the marginal revenue curve

lies below the demand curve for the monopolist. The marginal revenue curve plots marginal revenue and quantity For a monopolist, P > MR, so the marginal revenue curve must lie below the demand curve

demand curve

plots price and quantity

monopoly

there is a single seller of a good for which there are no close substitutes, and there are extremely high barriers to competing with the single seller If a movie superstar has so much talent that the movie going public puts her in a class by herself, she might be considered a monopolist Her immense talent acts as a barrier to entry Even if others try to compete with her, they won't be a close enough substitute for her.