Econ Chapter 13: Monopoly
The monopoly produces the profit-maximizing output where,
MR = MC
Equilibrium output
MR = MC Demand curve at profit-maximizing output and Q is equilibrium price.
Monopoly will change the price it charges by changing where
MR goes up and hits the demand curve.
Barriers to entry
A constraint that protects a firm from potential competitors
JK Rowling's copyright on the Harry Potter series of books is an example of?
A legal barrier to entry
Legal barriers to entry
Create a legal monopoly: A market in which competition and entry are restricted by the granting of a: public franchise, gov license, or patent/copyright
Natural barriers to entry
Create a natural monopoly. A market in which economies of scale enable 1 firm to supply the entire market at the lowest possible cost. LRAC curve is still sloping downward when it meets the demand curve.
Sam's Surfboards is the sole renter of surfboards on Big Wave Island. For Sam's Surfboards, the change in total revenue for each additional surfboard rented is always _______.
Less than the rental price of a surf board.
For a single-price monopoly...
MR < Price
A monopoly that perfectly price discriminates is _______.
More efficient than a single-price monopoly
The activity of rent seeking shifts the firm's _______ curve upward.
ATC
Monopoly market characteristics:
-NO close substitutes exist -One supplier that is protected from competition by a barrier preventing the entry of new firms
Monopoly price setting strategies
1. A single-price monopoly: firm that must sell each unit of output at the same price to all customers 2. Price discrimination: practice of selling a good/service at difference prices
Two ways of price discriminating
1. Among groups of buyers 2. Among units of a good (Quantity discounts) Q discounts that reflect lower costs at higher quantities are not price discriminating.
Rent seekers pursue their goals in two main ways:
1. Buy a monopoly (transfers rent to creator of monopoly) 2. Create a monopoly (uses resources in political activity)
Price discrimination outcome differs from monopoly in two ways ..
1. Monopoly captures the ENTIRE consumer surplus 2. The increase in economic profit attracts firms that leads to inefficiency
3 types of barriers to entry
1. Natural 2. Ownership 3. Legal
How monopoly arises: 2 key features
1. No close substitutes 2. Barriers to entry
To be able to price discriminate, a monopoly must:
1. identify and separate different buyer types 2. sell a product that can't be resold
Which of the following is an example of a price-discrimination? A. IMAX charges $6 per movie ticket for children younger than 8, and $8.50 per movie ticket for adults. B. A rise in fuel costs has raised air fares. C. Greyhound records a greater ticket sale in summer than winter. D. Lower demand has resulted in a drop in car sales.
A.
Rent seeking costs shifts the _____ upward. Producer surplus ______.
ATC Producer surplus disappears Deadweight loss increases to the larger grey area.
Price differences that arise from cost differences ...
Are not price discrimination
Which of the following firms is most likely to be a monopoly? A. A local fast-food restaurant B. A shoe store C. A local distributor of electricity D. A computer store
C
A single-price monopoly...
Can sell a larger quantity only by setting a lower price.
By price discriminating, a monopoly ...
Captures consumer surplus and converts it into producer surplus. - More producer surplus means more economics profit.
When a monopoly that produces a service practices perfect price discrimination, _______.
Consumer surplus is 0
erfect price discrimination is the price discrimination that extracts the entire _____ surplus by charging the _____ price that _____ are willing to _____ for each unit.
Consumer; highest; consumers; pay
If elasticity of demand is unit elastic,
Fall in price doesn't change total revenue. MR = 0. Total revenue is maximized when MR=0.
Rent seeking is the lobbying for special treatment from the _____ to _____ or to divert consumer surplus or producer surplus away from others.
Government; create economic profit
The market supply curve in perfect competition is the
Horizontal sum of the individual firms MC curves. S = MC Perfect competition is where QD = QS
No close substitutes
If a good has a close substitute, even if it is produced by only 1 firm, that firm effectively faces competition from the producers of the substitute.
A single-price monopoly's MR is related to the elasticity of demand for the good.
If demand is elastic, a fall in price brings an increase in total revenue. MR is positive If demand is inelastic, a fall in price bring a decrease in total revenue. MR is negative
A profit-maximizing monopoly never produces an output in the _______ range of its _______ curve.
Inelastic; demand
The social cost of a monopoly ______.
Is greater with rent-seeking than it otherwise would be
The monopoly sets its price at the highest level at which
It can sell the profit-maximizing quantity. On a graph, this is the largest vertical difference between TC and TR. (Economic profit)
Many firms price discriminate, but
Not all are monopoly firms
Ownership barriers to entry
Occurs if 1 firm owns a significant portion of a key resource. Ex. during the last century, De Bears has owned 90% of the world's diamonds.
Perfect price discrimination
Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit MR = Price so demand curve is also MR curve Monopoly makes maximum possible profit.
A constraint that protects a firm from _____ is called a barrier to entry.
Potential competitors
A monopoly is a ______, not a _______ like a firm in perfect competition.
Price setter Price taker The reason is that the demand for the monopoly's output is the market demand. To sell a larger output, a monopoly must set a lower price.
Monopoly might make an economic profit in Long-Run, bc barriers to entry
Protect the firm from market entry by competitor firms.
But a monopoly that incurs an economic loss might
Shutdown temporarily (Short-run) or exit the market (Long-run)
Compared to perfect competition, monopoly produces a ______ output and charges a _____ price.
Smaller output Higher price
Any ____ is called economic rent.
Surplus
Economic profit = Producer surplus =
TR - TC TR - TVC
When a firm practices perfect price discrimination _______.
The demand curve becomes the MR curve.
Efficiency & Rent-seeking with price discrimination
The more perfectly a monopoly can price dis. the closer the output is to the competitive out (P = MC) and the more efficient is the outcome.
Rent seeking
The pursuit of wealth by capturing economic rent. Economic rent = any surplus
A monopoly that can perfectly price discriminate has a marginal revenue curve that is ______ the demand curve for the good that the monopoly produces. If a monopoly can perfectly price discriminate, it produces ______ deadweight loss.
The same as; no
A natural monopoly is a monopoly that arises because one firm can meet the entire market demand at a lower average _____ cost than two or more firms could. A legal monopoly is a market in which _____ by the granting of a public franchise, government license, patent, or copyright.
Total Competition and entry are restricted
When MSB = MSC ...
Total surplus is maximized The Q produced in perfect competition is efficient
In monopoly, elasticity of demand is always
elastic.
