Econ Ch. 15

How can govt respond to monopolies? Increasing competition with ____ laws (though can prevent companies from lowering costs through more efficient joint production- synergies are the benefits from mergers)

antitrust

_____ _____ equals Price for monopolists, just like it does for competitive firms. The demand curve is therefore also the average revenue curve. MARGINAL revenue (change in total revenue over change in quantity) does not equal Price though.

average revenue

marginal revenue curve and demand curve are not the same for monopolies. MR curve is _____ demand curve

below

Because a monopoly charges a price above marginal cost, not all consumers who value the good at more than its cost buy it. Thus the quantity produced and sold by a monopoly is below the socially efficient level. The _____ _____ is the area of the triangle between the demand curve (value of good to consumers) and the marginal cost curve (cost of the monopoly producer) Bounded by marginal revenue curve! SEE GRAPH ON 312. Similar to tax wedge but monopolists collects the tax. The monopolist produces less than the socially efficient quantity of output, at a price that is inefficiently high

deadweight loss

The socially efficient quantity is found where the ______ curve and the marginal-cost curve intersect. Maximizes total surplus in the market. Below this level, value of the good to marginal buyer (as reflected by Demand curve) exceeds the marginal cost of making the good. Above this level, the value to the marginal buyer is less than marginal cost.

demand

A competitive firm's demand curve is in effect horizontal (perfectly elastic). Can sell as much or as little it wants at this price. Because the competitive firm sells a product with many perfect substitutes (the products of all the other firms in its market) the demand curve that any one firm faces is perfectly elastic. Because a monopoly is the sole producer in its market, its demand curve is the market demand curve, so it slopes ______ for all the usual reasons (raise the price, consumers buy less, lower price, consumers buy more)- this constrains the monopolist!!!

downward

the government gives a single firm the exclusive right to produce some good or service (ex. Patent and copyright laws, which encourages research/better books)

government regulation

While a competitive firm is a price taker, a monopoly firm is a price ___ A monopoly firm can control the price of the good it sells, but because a high price reduces the quantity that its customers buy, the monopoly's profits are limited

maker

A monopolist's ______ is always less than the price of its good because of the downward-sloping demand curve (Q increases, Price decreases)

marginal revenue

a firm that is the sole seller of a product without close substitutes

monopoly

a key resource required for production is owned by a single firm (ex. DeBeers, basically)

monopoly resources

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms Arises due to economies of scale, as one firm's average total cost curve continually declines, and it has a natural monopoly. In this case, if production is divided among more firms, each firm produces less, and average total cost rises (smaller Q to divide Total Cost by!)- so a single firm can produce any given amount at the smallest cost As the market expands, a natural monopoly can evolve into a more competitive market (ex one bridge in a growing town- will soon need 2 bridges!)

natural monopoly

Marginal revenue can become _____ for monopolies when the price effect on revenue is greater than the output effect. In this case, when the firm produces an extra unit of output, the price falls by enough to cause the firm's *total* revenue to decline, even though the firm is selling more units.

negative

One way govt can respond to monopolies: Doing ______ : some economists think that politicians are too bad at regulating the economy to really help it.

nothing

a situation in which the monopolist knows exactly each customer's WTP and can charge each customer a different price. Monopolist gets entire surplus in every transaction. See page 316 for graph! The graph is drawn assuming constant per unit cost (marginal cost and TC are constant and equal). All mutually beneficial trades take place and there is no Deadweight loss! Does it affect welfare? No good answer as to how it affects total surplus.

perfect price discrimination

______ ______ can raise economic welfare by decreasing deadweight loss for the firm (because it is maximizing its profit by selling to more people at their WTP price. There is no Consumer Surplus tho- they pay exactly what they are Willing to Pay)

price discrimination

the business practice of selling the same good at different prices to different consumers (ex. Selling an expensive hardback to die hard book fans initially, then later selling paperback to less enthusiastic fans), movie tickets (children and seniors less WTP), airline prices, discount coupons, financial aid, quantity discounts. Arbitrage (buying a good from one market at a low price and selling it in other market at a higher price to profit from the price difference) can prevent price discrimination.

price discrimination

Equation for ______ is same as for competitive firms: Profit = (P-ATC) x Q

profit

One way govt can respond to monopolies: _______: when a govt runs the monopoly itself. (ex the Postal Service) However, private owners are incentivized to minimized costs as long as they get higher profit from it. But if the bureaucrats do a bad job of keeping costs down, then the only way consumers can respond is voting booth, which is less reliable.

public ownership

One way govt can respond to monopolies: _______: regulate prices! But don't set price to marginal cost because a natural monopoly has a declining ATC, meaning MC is less than ATC. Therefore if regulators require a price equal to MC, price would be below ATC and the monopoly will lose money and exit in long run. Govt could maybe subsidize this. But then needs to tax for this. IN practice regulators allow monopolists to keep some of the benefits from lower cost in the form of higher profit.

regulation

The monopolist's profit-maximizing quantity of output is determined by the intersection of the marginal-______ curve and the marginal-______ curve. For a competitive firm: P = MR = MC For a monopoly firm: P > MR = MC Once a monopoly firm chooses the *quantity* of output that equates marginal revenue to marginal cost (max profit) it find the price on the demand curve that marches that quantity. In competitive markets, price equals marginal cost. In monopolized markets, price exceed marginal cost.

revenue, cost

When a monopoly increases the amount it sells, this action has two effects on *total* (not marginal!) revenue (PxQ). _____ more output is sold, so Q is higher, which tends to increase total revenue The price effect: the price falls, so P is lower, which tends to decrease *total* revenue on the units it was already selling. -> this leads to *marginal* revenue being less than price. Because the price on all units sold must fall if the monopoly increases production, the *marginal* revenue is always less than the price.

the output effect

When a monopoly increases the amount it sells, this action has two effects on *total* (not marginal!) revenue (PxQ) The output effect: more output is sold, so Q is higher, which tends to increase total revenue __________ the price falls, so P is lower, which tends to decrease *total* revenue on the units it was already selling. -> this leads to *marginal* revenue being less than price. Because the price on all units sold must fall if the monopoly increases production, the *marginal* revenue is always less than the price.

the price effect