Chapter 15 Microeconomics

Public franchise

A firm designated by the government as the only legal provider of a good or service.

Monopoly

A firm that is the only seller of a good or service that does not have a close substitute.

Does a monopolist have a supply curve?

A monopolist does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.

Marginal Revenue

Change in Total revenue divided by change in quantity

Firms with market power create deadweight loss because they...

Charge a price that is greater than marginal cost to maximize profits.

When a market goes from monopolistic to perfectly competitive

Consumer surplus will be smaller, producer surplus will be greater and there will be a reduction in economic efficiency

Network externalities

Exist when the usefulness of a product increases with the number of consumers who use it.

A tax is a... ________ cost

Fixed cost, because it's a flat rate every time.

A supplier of an input is unlikely to have bargaining power if

Many firms can supply the input

the only firms that do not have market power are businesses in.... _____ markets

Perfectly competitive markets, because they have to charge the price thats equal to marginal cost.

A firm will break even when

Price equals average total cost

A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore, the firm is a

Price taker

Is the usps a natural monopoly?

Probably not because if it were, then a law blocking competition would not be necessary.

A monopoly will produce _____ and charge a _____ price than would a perfectly competitive industry selling the same good

Produce less and charge more.

When a tax is imposed on a business, the ONLY thing that is affected is...

Profit, it does not change how much you should charge or how many subscriptions it should sell.

The total deadweight loss from market power for the economy is...

Small

Why does the government grant patents?

So firms can continue to develop new ideas and products after 20 years.

Using a broad definition, a firm would have a monopoly if

There is no other firm selling a substitute for its product close enough that it's economic profits are competed away in the long run

What is the relationship between a monopolies demand curve and its marginal revenue curve?

They are both always downward sloping

What is the relationship between a monopolies demand curve and the market demand curve?

They are both the same curve

marginal cost

change in Total cost divided by change in quantity

If a perfectly competitive industry turns into a monopoly, then consumer surplus will...

decrease

Economies of Scale

occurs when a businesses cost of producing items goes down as production increases. (Cost goes down, production increases)

When the government wants to give an exclusive right to one firm to produce a product, it

Grants a patent or copyright

To be a natural monopoly, a firm must

Have economies of scale that are so large that it can supply the entire market at a lower cost than 2 or more firms

Ted's pancake kitchen suffers a short-run loss. When should Ted decide to shut down rather than continue to produce?

If his kitchens revenue is less than it's variable cost

Suppose that a monopoly becomes a perfectly competitive industry. As a result, consumer surplus will ---, producer surplus will ---, and deadweight loss will ---.

Increase, decrease, and decrease.

If a perfectly competitive industry turns into a monopoly, then the producer surplus...

Increases

When a firm faces a downward-sloping demand curve, marginal revenue

Is less than price because a firm must lower its price to sell more

if a perfectly competitive industry becomes a monopoly, then we know that the industry supply curve becomes the monopolies...

It becomes the marginal cost curve. (The supply curve transforms into a marginal cost curve)

If a perfectly competitive firm achieves productive efficiency then

It is producing the good it sells at the lowest possible cost

To maximize profit a monopolist will produce where

Marginal revenue is equal to marginal cost

Does tax affect marginal revenue or marginal cost?

No, the only thing it affects is profit.

A natural monopoly

Occurs when economies of scale are so large that one firm can supply the entire market.

four barriers of entry created by a monopoly:

The government blocks entry, control of a key resource, network externalities, economies of scale

When firms in a perfectly competitive market are earning economic profits, what happens when new firms enter the market?

The market supply curve shifts to the right, causing price to fall and output to increase

Profit formula

Total revenue- Total cost

Market Power

When a business has the ability to charge a price greater than the marginal cost.

How does a monopoly choose its output level and price?

When marginal revenue= marginal cost

Does a monopoly reduce economic efficiency?

Yes, it does, because it causes a deadweight loss.

Can a monopoly make a profit in the long run?

Yes, it is the only type of business that makes a profit in the long run

If you own the only hardware store in a small town, do you have a monopoly?

Yes. You would have a monopoly if your profits are not competed away in the long run.