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