ECON QUIZ #6
barriers to entry
any impediments that prevent firms from entering a market or industry
common mistake when analyzing long run behavior
assuming too many firms will enter the market
where monopolies get power
barriers to entry (copyright, patent, location)
marginal revenue equation
change in total revue / change in quantity
bc a pure monopoly is the only seller in a market the demand is
downward sloping
loss experienced by a firm
rectangle area between MC line and ATC line
contestable market
there is only one firm but no real barriers to entry
profit per unit
= Price - ATC
average total cost equation
= Total Cost / Q = AFC + AVC
regulated competitive price
A regulated price that is equal to the marginal cost of production The competitive price can be found where the marginal cost curve intersects the demand curve, and it is allocatively efficient
profit equals eqn in terms of total revenue and total cost and answers
TR - TC if its more than 0 theres economic profit if it equals 0 there normal profit if its less than 0 firm generates a loss
price discrimination
The practice of selling the same product to different consumers at different prices
long run expectations for a market currently generating economic profits
economic profits will create an incentive for other firms to enter market, which will result in a increase in market supply, generating lower market price market price and thus marginal revenue will decrease up to a point at which the economics profits previously generated by firms disappear in the long run
in the presence of economic profits firms
enter until market reaches the point at which the firms are generating a normal profit, then entry stops, and the market settles into its long run equilibrium
in the presence of losses firms
exit until the market reaches the point at which the firms are generating a normal profit, then exit stops and the market settles down into its long run equilibrium
when price is equal to minimum avg total cost of production in long run equilibrium
firms break even and generate normal profits and market is both productively and allocatively efficient
results of second degree price discrimination
firms encourage some consumers to purchase more of a good than they otherwise would resulting in increased output sold and larger profits
monopolies production
produce less output then competitive markets likely to hire less labor at lower wages they reduce the availability of goods and your ability to buy them
productive efficiency
producing output at the lowest possible average total costs, using the fewest resources possible to produce to produce a good or service
allocative efficiency
producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost
profit in terms of price, ATC and output and answers
profit = profit per unit * output = (P - ATC) * Q if its more than 0 theres economic profit if it equals 0 there normal profit if its less than 0 firm generates a loss
two often used regulated prices
regulated normal profit price - equal to ATC of production regulated competitive price - equal to MC of production
consumer surplus on monopoly graph
same as before the triangle formed by the demand curve ABOVE the price
monopolies being price makers does not always gaurentee
economic profit it could generate normal or even a loss
marginal revenue
the change in a firm total revenue that results form a one unit change in output produced and sold
profit per unit a pure monopoly is able to charge on a graph
the difference between the demand curve and the ATC curve at a given quantity
economic profit
the level of profit that occurs when total revenue is greater than total cost
when company will produce at a loss when
AVC </= Price < ATC
normal profit
The level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is also known as zero economic profit.
economies of scale
a condition in which the long run average total cost of production decreases as production increases
long run equilibrium
a market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit generally occurs when the market price is equal to the minimum average total cost faced by firms
monopoly def
a market structure characterized by a single seller, producing a good or service for which there are no close substitutes, in a market with relatively blocked entry price maker
regulated normal profit price
a regulated price that is equal to the average total cost of production the normal profit price can be found where the ATC curve intersects the demand curve
long run supply curve
a supply curve that represents the long run relationship between price and quantity supplied
short run supply curve
a supply curve that represents the short run relationship between price and quantity supplied for a perfectly competitive firm, the portion of marginal cost curve that is at or above minimum point of the average variable cost curve
governments with regulate natural monpolies to
allow consumers to enjoy lower prices and greater availability
natural monopoly
an industry in which economies of scale are so extensive that the market is better served by a single firm
constant cost industry
an industry in which the firms cost structures do not vary with changes in production
working out problems of 3rd degree price discrimination
first find the quantity at which MR equals MC for the price group nd find price this group is willing and able to pay then do the same with the second group DO NOT do at the same time
marginal revenue curve graphically in a pure monopoly
found below the demand curve
what monopolies have to do if they want to sell more units
have to lower the price of the product for every unit it sells
the economic profit or loss rectangle
height equal to difference between price charge ATC and base equal to profit maximizing quantity of output Qm if Pm>ATC the rectangle is e profit if Pm< ATC the rectangle is loss
when firms generate profit or losses in long run equilibrium
if price is above the minimum ATC firms generate economic profit and other firms want to enter market if price is below the minimum ATC firms generate losses and some firms might exit
important points the remember about first degree price discrimination
it generates the best outcome for a pure monopoly D=MR in this
firms begin producing when
market price or marginal revenue equals marginal cost and AVC
negative affects to producers of price ceilings on natural monopolies
may find the price regulation so severe that they may need to receive government subsidies to continues to operate
results of first deg price discrimination
more output being produced and sold than in a standard our monopoly generates more economic profit for the firm no consumer surplus
are our monopolies productively efficient
most likely no because of the lack of competitive pressures in these markets
profit maximizing behavior of a pure monopoly
no different from a perfectly competitive both produce up to the point at which marginal revenue equals marginal cost
every level of output by a perfectly competitive firm will be
on its marginal cost curve
perfectly competitive market efficiency
outcomes are often efficient firms produce at the lowest possible ATV, produce a mix of goods that are most wanted by consumers
when comparing monopoly outcome and perfectly competitive outcome
perfectly competitive outcome is located where the marginal cost curve intersects demand curve
if a pure monopoly lowers the price of its product the marginal revenue is
positive must be that demand is elastic bc it increases total revenue
total revenue equation
price * quantity
shut down when
price < AVC
profit maximizing rule
produce at the quantity at which MR=MC
how to determine whether a pure monopoly generates a economic profit
set MR = MC to find profit maximizing quantity of output (Qm) project Qm up to the demand curve and then across to the corresponding price to identify the price that consumers are willing and able to pay project Qm up to ATC and the across to the correspond cost on the price axis to find ATC draw the economic profit or loss rectangle, height equal to difference between price charge and ATC and base equal to profit maximizing quantity of output Qm
difference with constant cost industries
short run dynamics experienced always return to long run equilibrium at the original market price that generate normal profits for firms long run market supply curve is a horizontal line originating at that market price
characteristics of a pure monopoly
single seller products has no close substitutes price makers barriers to entry
over expansion on the graph
supply curve shifts far to the right marginal revenue shifts up above AVC but not all the way to ATC
entry into the market on graph
supply curve shifts to the right marginal revenue line shifts up
monopoly power
the ability of a monopoly to influence prices by controlling the quantities that it produces in the market
monopolies do not produce at what level
the allocatively efficient level bc they maximize profits by choosing levels of output lower than those found in purely competitive markets
loss
the level of profit that occurs when total revenue is less that total cost
second degree price discrimination
the practice of charging different prices per unit for different quantities or blocks of a good also known as block pricing
first degree price discrimination
the practice of charging each and every consumer the price that she is willing and able to pay for a good also known as perfect price discrimination or personal pricing
third degree price discrimination
the practice of dividing market participants into groups based on their elasticities of demand in order to charge each group a different price for the same good they charge a lower price to consumers with more elastic demand or more responsive to price changes
unregulated monopoly price
the profit-maximizing price that will result from an unregulated monopolistic market
deadweight loss
the value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium
deadweight loss in monopoly graph
triangle formed between the point where marginal revenue and marginal cost cross, and demand curve and Qm
when firms in a perfectly competitive market generate economic profits in the short run other firms will
want to enter the market